In today’s complex financial landscape, borrowing money is a common part of managing personal – and business – finances. You are likely aware that not all debt is equal – you can get good debt vs bad debt. Some types of debt can be helpful, while others with high interest rates can quickly accumulate and put yourself and your family’s finances at risk. Understanding the difference between good debt and bad debt can have a significant effect on your credit score, your borrowing behaviour, and your financial wellbeing. When you borrow responsibly, it can present opportunities to achieve important life milestones, tackle unexpected expenses, or even to grow a business. In Canada, there are several reasons when borrowing money might be considered a good idea. So, what are good reasons to borrow money? In this article, we share some of the good reasons to borrow money in Canada, and how to make considered decisions on borrowing.
What are good reasons to borrow money?
Generally speaking, banks, financial institutions, and lenders, any money borrowed to improve your financial situation now or in the future is considered a ‘good debt’. Below are some good reasons for borrowing money.
Investing in education
Education is an investment that can really pay off throughout your life. By taking on higher education or developing your skills, you can discover career opportunities and increased earning potential. Although education can be expensive, student loan debts in Canada usually come with favourable repayment terms and low interest rates. Borrowing for your education is often considered an investment in your future, as it allows you to develop valuable skills and knowledge that can help you to succeed in your chosen career.
Buying a home
Owning a home in Canada is a financial milestone for many individuals. Often, the only way most people can do this is through a mortgage. Real estate in Canada has proven historically to show steady appreciation, making it an ideal long-term investment. Mortgage rates in Canada are fairly competitive, and when you can build home equity over time it can make owning a home rewarding financially.
Launching a business
An important force in Canada’s economy is entrepreneurship. If you have a great business idea, or a business that is ready to grow, borrowing money is often the only way you may be able to start or expand your business. A business loan can cover expenses like inventory, tools, office space, or marketing. With a tight business plan and careful organisation, borrowing for business reasons can generate revenue and profitability.
Paying for emergency expenses
We all know that life can be unpredictable. Whether you are facing unexpected medical bills, a divorce, expensive home repairs, vehicle maintenance, or urgent travel, borrowing money can help you to better navigate unforeseen circumstances without losing your financial stability. Many Canadians choose to take out personal loans or lines of credit to fund these emergencies. Provided you make your repayments in full and on time, this is a good way to fund emergency bills.
Debt consolidation loans are new loans that are taken out in order to condense multiple high-interest debts, like credit card debts or tax debts. They have the advantage of simplifying your debt payments into a singular monthly payment, and in most cases reduce the amount of interest you need to pay. It helps to simplify your debts, and can put you on the journey to gaining debt relief.
Making large purchases
Sometimes in life, we need to make expensive, necessary purchases. This might be for things like household appliances or expensive house repairs. For many of these items, they may be unaffordable upfront. By taking out finance instead – like auto loans – you can benefit from the convenience of spreading out the cost of an expensive purchase over time.
What are bad reasons to borrow money?
Any reason to borrow money that will not result in an increase in value or grow your net worth may be considered a bad debt. Common examples of bad debt include the following:
Credit card debts
Credit card debts are some of the highest interest debts on the market. They are also most often used for products that do not generate income – for instance, food, entertainment, shopping, and vacations. Due to the associated interest, they can make purchases cost a lot more over time.
Payday loans can become extortionately expensive when not repaid or handled correctly. While originally intended to bridge the gap between paycheques, paydays have astronomical interest rates which can quickly accumulate on debts when not repaid in full on time. Payday loans can put your future income at risk in order to gain quick cash in hand short term.
It is broadly accepted that vehicles depreciate the moment you buy one – no matter where it is used or new. Paying high interest on vehicles that decrease in value so quickly is often not a good financial move. Although many Canadians consider a vehicle a necessity, most people cannot purchase one without finance. You should be very careful in considering the amount you can realistically afford to spend on a vehicle, as well as any required upkeep.
Still wondering what are good reasons to borrow money? Borrowing money in Canada can work well when truly considered and when it is an investment. As long as you understand your financial goals when taking out the funds and have a realistic payment plan, it could work well for you. If you are in need of finance and are unsure of which pathway to take, book a free consultation with one of the expert team members at Spergel. We will review your circumstances and recommend a pathway for you.