There's no single scenario that allows people to determine the benefits of debt. Economic changes can easily shake up any conventional wisdom about debt that people have long held. Therefore, you have to examine your finances to decide whether taking on debt will benefit you because it's an investment, offers a tax advantage or provides some other significant advantage.
Education Loans
Getting a student loan to fund a college education for yourself or your child can be a beneficial debt. A college degree generally can help a person obtain a higher salary, especially in industries that require technical knowledge. Education loans also are a better option if you're faced with racking up debt on credit cards to pay for textbooks or other college expenses. Education loans usually have significantly lower interest rates than credit cards offer, and U.S. tax incentives also are available to help pay for college expenses.
Mortgages
Mortgages also usually have lower interest rates than other forms of debt. In addition, the interest paid on a home loan is often tax-deductible. Any home you buy also may increase in value over time. However, an economic downturn could cause home values to drop significantly and leave some homeowners owing more on their properties than those properties are worth. Yet people who take on mortgages they can comfortably afford to repay may prefer home ownership over paying rent for an apartment or other property that they'll never own.
Business Loans
Like college and mortgage debts, business loans can deliver financial returns to borrowers that are much higher than the original loan amount. Successful businesses are started with bank loans as well as through U.S. Small Business Administration loan programs. Existing businesses also use debt from loans to expand, which ultimately can increase their profits.
Auto Loans
Auto loans may be considered bad debts because the value of new and used cars begins to drop soon after they're bought. People who only make a 10 to 15 percent down payment on the purchase price of a car can quickly see the cost of the loan exceed the value of the vehicle. However, some consumers consider buying a vehicle as part of the cost of doing business, and some business-related travel expenses are tax-deductible. In such cases, an auto loan may be a beneficial debt because it ultimately helps employees and business owners who use their vehicles for work to get their jobs done.
Overall Debt
Debt that's managed properly can be beneficial because it helps people establish good credit histories, which helps qualify them for mortgages, business loans and other important financing that most people can't pay out of pocket. The benefits of debt are realized by not taking on more than you can afford to repay. Keeping debt in perspective involves weighing the benefits of taking on new debt against its overall cost, including interest payments.
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