Whenever you read an article about improving finances, debt reduction is invariably included in the list of suggestions. In fact, there is such a strong bias against debt out there that you may think debt–all of it–is bad. You may not realize, then, that debt can be part of a responsible strategy toward financial security.
Benefits of Debt
Debt gives you a way to get now the things you can’t afford to pay for right at this moment. In that way, it advances you the funds you would need to purchase items or take advantage of services. In exchange for the debt extension, you agree to make regular payments of the principal borrowed along with interest, which allows the lender to profit from the advance. This basic arrangement holds true whether it’s fast cash personal loan options or a 30-year mortgage.
Lots of things people use debt for, like vacations or dinners out, are not the best strategic use of the medium. There isn’t any real gain that makes the expense of the advance worth it for these purchases. In other cases, however, you can measure the profit that you get from debt. One instance where you can weigh the benefits is when buying a house. By buying a house through debt at today’s prices, you lock in a lower overall expense for yourself while also removing the need to pay rent. Later, when you decide to sell, you can often do so at a profit as real estate prices will have increased. This more than pays for the cost of the advanced money.
Another example of debt creating an important benefit is when it’s taken on by a business. The cash flow inside a business isn’t always enough to help that business scale. Taking on debt to increase production of products or services can create immense profit that makes paying interest on the debt utterly worth it. In other cases, taking on debt can allow someone with a good idea to start a business that provides for their family and may even allow them the opportunity to later sell at a profit.
Using loans responsibly starts with having a purpose for the loan that makes it worth paying the interest. It ends with managing debt continuously. Managing debt means several things, such as:
- Controlling overall debt: The benefits of strategic debt are offset by irresponsible or out-of-control debt. Continue to monitor debt-to-income ratios to ensure you keep them below the generally recommended 40 percent.
- Making payments: You need to make at least minimum payments on debt, but to manage it effectively, accelerating payments on debt to reduce overall fees is the best option. Find out whether you have prepayment penalties first, however, and determine whether those are higher than interest over the normal term would be.
- Avoiding additional fees: Late fees add another expense to loans, but worse than that, they are completely unnecessary. Adding them to your total by missing payments means reducing the effectiveness of the loan and the potential gains you get from it. To manage debt, one thing you must do is choose to set a reminder to make payments on time or set up automatic payments so that you never miss a due date.
Debt doesn’t have to be all bad, but it’s up to you to make sure it’s good. Use debt as a strategic asset for your plans and manage it effectively to ensure you get the most out of it.