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Rethinking Debt

By Debt.ca on November 27, 2013 No Comments

When it comes to debt, it seems people fall nicely into these two categories. Some people passionately believe that all debt is bad, while others argue that the only way to truly get ahead is by using borrowed money as leverage.

At Debt.ca our goal is obviously to help people get out of debt, but sometimes it’s important to reexamine your assumptions. Is it possible that debt isn’t as bad as we think it is?

Money is cheap

At the moment, interest rates are incredibly low. From a line of credit to a mortgage, you can probably afford to borrow much more than you could before. Is it possible that those of us on the no-debt-ever side of things are missing out on some huge opportunities?

Do the numbers tell the story?

If you were GUARANTEED to make more money than the interest you were paying, borrowing money would be a no-brainer right?

Said another way, if risk were completely eliminated, of COURSE you’d borrow money, earn a lot, and pay off your interest and eventually your debt.

But life doesn’t work like that. A low interest rate definitely makes your debt more manageable with lower monthly payments, but it does nothing to mitigate the risk of borrowing.

Unfortunately, that risk is very difficult to analyze.

Analyzing Risk

To see how numbers confuse the issue, try this simple thought-experiment. Assume you took out a mortgage with a 0% interest rate. Yes, 0%. What’s the risk?

  • You could lose your job and be unable to make the monthly payments
  • Your home could go down in value, making it next to impossible to sell if you have to move for any reason
  • Your home could go up in value, causing your property taxes and insurance to go up as well
  • Etc. etc.

The point is, there is ALWAYS a risk when you go into debt, and the interest rate is only a small part of that.

What are successful people doing?

Without a doubt there are some people who are capitalizing on low interest rates to invest and profit from. In the US during the housing crash, investors used low interest rates to buy up properties which are now recovering their value (in many areas).

Business loans are cheaper, meaning starting or growing a business carries less risk. This is because owners have a longer time-frame to pay back the loans, giving them greater flexibility – a huge benefit.

Is that the whole story?

Sure some people are profiting, but plenty of people are using cheap money to dig themselves an even deeper hole. You probably won’t hear about these people, but as the analogy goes, you can’t get out of a hole by digging.

Should you change your mind?

If you’re reading a debt blog, there’s a good chance debt hasn’t been a good friend to you up to this point. Take a long hard look back at your financial decisions and see if a lower interest rate would have helped you avoid this situation.

Our guess? Probably not.

Jumping on cheaper money seems a bit like jumping on any get-rich-quick scheme. It’s the same impulse, the same vision of that guaranteed return, and the same inevitable wake-up call that things aren’t as bright as you thought they were.

Our recommendation: Don’t rush into something like buying a house or taking a business loan just because rates are low. If you’re doing it ANYWAY, then great, you’ll get a good deal, but if a point or two is the difference between making it or breaking it, we’d say steer clear.

Debt.ca

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