Borrowing can be a good financial strategy if it helps you acquire something – like a house or an education – that could add to your net worth. It can also help you acquire things like a car that you can’t easily save up for in a timely way. As with any debt, consider the interest costs and only borrow what you can afford.
When it may make sense to borrow
1. Buy a home
If you choose to buy a home, you’ll likely need to get a mortgage. Although buying a home isn’t for everyone, it can be a good investment if the value of your home increases over time.
2. Buy a car
If you need to buy a car, you might have to take out a loan or lease to pay for it. Always weigh the cost of borrowing against using your own savings.
3. Pay for education
Student loans are one of the cheapest forms of debt. They can be a good investment if getting a degree means you’ll make more money when you enter the workforce.
4. Save for retirement
You may want to borrow money to put into an RRSP. RRSP contributions lower your taxes, and you’ll be saving for your future. To reduce the amount of interest you’ll pay on this loan, pay it within a year.
5. Start a business
The type of loan you need depends on how much you want to borrow, how you plan to use the money, how long you’ll need it, and how you’ll pay it back. Your borrowing options may include banks, trust companies, credit unions, government agencies, or family and friends. Make sure you have a solid business plan and a strategy for paying back your business loans.
6. Pay off debt at a lower interest rate
If you have a lot of high-interest debt, look into paying off that debt with a lower-rate consolidation loan. Two common options are a home-equity loan or line of credit. The interest rate may be low, but keep in mind that you could lose your house if you don’t make the payments.
Use this calculator to see how long it will take you to pay down debt at different interest rates.
