Debt is a dirty word for many personal finance professionals. They encourage folks to kill their debt ASAP. In general, many of the debts that people take on are bad. They cost money and provide little in the way of lasting financial benefit for the borrowers who incur them. There are, however some types of debt that come with benefits of borrowing that can help ordinary folks build financial security over time.
Here are a few debts that can pay off in the long run:
The main draw of personal loans and similar financial products is the freedom bestowed upon the borrower regarding what they can use it for. This makes online installment loans and other short-term borrowing options potentially useful in the preservation of a home, repair of a vehicle, or purchase of equipment used to earn money. What these and similar examples demonstrate is the way in which a personal loan can enable someone to protect assets as well as generate income, both of which have the potential for a strong return on investment down the road. At the same time, the freedom of personal loans runs the risk of irresponsible usage. By spending the money on a vacation or new clothes, borrowers are not using it to attain financial security and instead are finding themselves deeper in debt.
There are two types of mortgages that can pay off with financial freedom over time. Taking on a mortgage for a family home can be a great way to build equity over time. The house will effectively become a forced savings account, and homeowners can hopefully be able to downsize after retirement and access some cash. It can also be a good idea to borrow for rental homes. As long as the home or apartment complex remains rented, the tenants will pay off the mortgage for the borrower. After the mortgage is paid off, the monthly rent will largely just go toward improving the financial situation of the owner. He or she can continue to collect rent checks or sell the homes and pocket the proceeds.
Would-be entrepreneurs might have great ideas. What they frequently lack, however, is money. This is where a small business loan or a strategic credit card application can provide a quick infusion of capital that can take the small business from an idea to a reality. As long as the business can bring in enough cash to pay the bills, the dream can stay alive. The biggest risk is a lack of revenue that can make it difficult to pay the bills off.
A final way that debt can pay off to financial freedom is through taking on student loans. Ideally, people will be able to cash flow an education. This is not possible for many people, especially those who want to get professional degrees. Those who earn a JD or an MD will likely benefit through higher earnings so a student loan can be an investment for these people. One of the risks of borrowing with student loans is the possibility that a good job will not come, and the loans cannot be discharged in bankruptcy. The borrowers are basically stuck with a growing debt at that point.
Not all debts are created equal. Purchasing a new pair of shoes or a handbag on credit for a couple hundred dollars is not a good idea. On the other hand, borrowing for a house or higher education can really pay off. A good rule of thumb is only to borrow to make money, not to spend money.
Tarik Pierce is the founder of InvestorTrip.com and regularly contributes articles to this website.
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