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Question:


Under what circumstances do you think it’s OK to borrow money? In what situations is it a bad idea to borrow via a loan or a credit card you can’t pay off immediately?
-PortlandPride


Answer:


A helpful rule of thumb is that borrowing is good if it’s done to finance investment and bad if it’s used for consumption. A home is the biggest investment that most individuals are likely to make, and few have the wherewithal to buy one without a mortgage. What makes a home an investment is that some portion of payments goes to building up the owner’s equity in a tangible asset. Also, real estate tends to rise in value over the long term (the last few years are exceptional, but keep in mind that the term sometimes must be very long before any investment pays off).
 
Borrowing is ill advised, by contrast, if the money is used to pay for ephemeral needs or wants. When taking out a loan for a vacation, for instance, or charging a big night out on the town to a credit card, consumers may find that the fun runs out long before the payment of it does. Better to save up for such purchases instead. For other items, especially those with a long potential life, such as a car, whether to borrow can be a tougher call. Just remember, borrowing can be good or bad, but it will be downright awful if you can’t pay the money back.
-Conrad de Aenlle



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