Debt is one of those words that elicits strong reactions from everyone. Some people think debt is the devil and should be paid back as soon as possible, while others think its perfectly fine to be in debt. Most people will agree on one thing though: debt is something that can be good in certain situations. In these situations, debt can help people do something they wouldn’t be able to under normal circumstances.
Reason 1: Mortgages
Most people want to buy a home at some point in their lives. But most people can’t stump up all the cash to buy a home. For example, in 2018 the average price of a home in the UK is £244,000 but the average salary was £35,000. This would mean that the average person would have to save all their money for 7 years just to afford the home! Of course, this is inconceivable which is why mortgages exist. Without a mortgage, it would be impossible for anyone but the impossibly rich to ever buy a home.
Reason 2: Starting a Business
Starting a business often requires more money than you have. For example, suppose you wanted to start a restaurant. You would need to pay a lease. You would need to pay for the staff. You would need to pay for the equipment and the refurbishment of a building. These upfront costs are not cheap and are out of reach of most people. A loan can help with these costs and make starting a small business viable.
Reason 3: Cash Crunches
A cash crunch happens when you need cash urgently but for whatever reason can’t get it. This doesn’t just apply to people who aren’t earning very much, but also those with good jobs. If most of someone’s assets are tied up in the real estate, and money is urgently needed, it may take several months to sell a house. An emergency loan to bridge the gap may be needed. IF you don’t have a savings account.
Reason 4: Loyalty Program Credit Cards
Many credit cards earn airline and hotel points for putting spend through the card. These points can be a lucrative opportunity to save money on travel and take advantage of other perks, such as airport lounge access. Credit card debt can be bad if you are paying interest on it. But, if you pay your bills every month, you won’t pay any interest and you will still get the loyalty points.
Reason 5: Used for Investment Leverage
In the world of investments, leverage is the concept of borrowing money to invest in something else. For leverage to be successful, the amount earned from the investment must be greater than the interest paid on the loan. This is often possible in certain types of investments (such as real estate) and offers savvy investors a way to make more money than they normally could.
While the five reasons outlined describe ways that debt can be good, taking on debt is still a highly risky proposition. If debt gets out of control, there is the potential to lose your livelihood. Even with good debt, it must get paid off on schedule. You should only take on debt you can afford.