This story originally appeared on The Penny Hoarder.
That’s what financial writer Robert Kiyosaki calls the common advice to get out of debt.
Of course, he’s not in favor of bigger credit card balances. He advises borrowing to buy wealth-building assets, like a rental property.
Many financial experts make a distinction between “bad” and “good debt,” the latter referring to investment and business debt.
But the definition may be a bit limited, because there are several good reasons to borrow money. They include the following.
To Make Money in Various Ways
Borrowing for investment and business purposes are obvious examples.
But good debt can also include educational debt that leads to a degree, boosting lifetime earnings. If getting a car loan is the only way you can make it to work, it also might be a good reason to borrow.
To Save Money in Various Ways
Good debt can also include borrowing for purposes that help you save more money than the debt costs.
The most obvious example is borrowing to buy a house when it’s cheaper than renting. Another example is borrowing to insulate an attic, permanently reducing heating bills.
To Cover Emergency Expenses
This is a tricky area. “Emergencies” can largely be prevented — in theory.
For example, you know you’ll eventually have an expensive car repair. You could save for it, rather than let it become an emergency that requires going into debt.
On the other hand, borrowing for crucial (and unpredictable) medical care is an example of good, and often necessary, debt.
The Worst Ways to Borrow Money
Clearly, there are times when you should go into debt.
But to borrow smart, you also have to consider how you borrow.
When you carry credit card debt, you pay more for everything in interest charges.
If you can afford loan payments for a car, boat or vacation, you can afford to save for those instead. Why add interest to the cost?
In general, consumer debt is all “bad debt.”
But even when you have a good reason to borrow, some ways to do it are worse than others. Following is a look at some of the worst ways to borrow money.
“On average, payday loans carry a 391% APR (annual percentage rate),” or about 100 times higher than mortgage rates, according to the Center for Responsible Lending.
And since the average payday borrower has numerous annual transactions, it’s not likely this is true emergency borrowing.
Even the next option on our list is probably better than a payday loan.
Depending on state regulations, annualized interest rates at pawn shops can get as high as 240%, Nolo.com points out.
Rather than borrowing against things you value (and risking their loss), find things you no longer need and sell them to raise the cash you need.
Credit Card Cash Advances
The average credit card cash advance interest rate is 24.24%.
It’s better than pawn shops and payday loans, but there’s more to the story. The cash advance fee is often 5% of the amount borrowed.
A credit card cash advance loan of $2,000 for three months with 5% upfront plus 24% interest has a true annual rate close to 44%.
Putting what you need on a credit card is better than getting a cash advance.
There’s no extra fee and the average purchase interest rate is 6% lower. Of course, you should still avoid borrowing at 18% interest as much as possible.
Smart Ways to Borrow Money
Good debt improves your life in lasting ways, usually by increasing your income or reducing expenses.
But even for a good purpose, you don’t want to pay too much for the money you borrow.
Fortunately, there are many affordable ways to borrow, and one of the following will probably work for your situation.
1. Social Lending Websites
Peer-to-peer lending platforms like Lending Club and Prosper allow you to borrow large amounts (up to $50,000 on Lending Club) from groups of people who each invest a little bit into your loan.
Interest rates start as low as 5.32% and go as high as 35.97% on Prosper. But loan origination fees (up to 5% upfront) increase the real cost.
P2P websites let you borrow money for just about any reason.
For example, you might save money on existing debt by getting a consolidation loan at a lower interest rate — but be sure to calculate all the costs.
Lending Club also offers small business loans of up to $300,000 at rates as low as 5.9%.
2. Cash Advance Alternatives
See my post on five alternatives to costly cash advances for ideas on how to borrow strategically when you need a short-term loan.
3. Home Mortgage Loans
Comparing these options is tricky, but they all have better interest rates than the previous alternatives. The line of credit is the most flexible, allowing you to borrow only what you need when you need it.
This can be a smart way to borrow and buy income-producing assets, thanks to the typically low interest rates on home loans.
“The interest you pay on a mortgage on a home other than your main or second home may be deductible if the proceeds of the loan were used for business, investment, or other deductible purposes,” the IRS reports.
Talk to your accountant to be sure you set things up right when you borrow for business or investment purposes.
4. 401(k) Loans
There are times when it makes sense to borrow from your 401(k) plan, like when you have an emergency or need a car to avoid losing a job.
One big advantage is all the “interest” goes right back to you, instead of a lender.
That’s assuming you pay back everything as planned, of course. Otherwise, you’re just sabotaging your retirement.
5. Student Loans
Borrowing for college is an investment that can pay big returns, and many student loans have real advantages over other forms of borrowing.
They may have low interest rates, and deferred payment options.
And if you run into financial trouble, there are loan forgiveness options you don’t get with other types of debt.
6. Investment Property Loans
Financing rental properties has become more difficult.
But if you can find a bank willing to loan you the money, the key thing to watch for is: Will you make money every month after all costs?
Borrowing for investments that produce positive cash flow is one of the smartest ways to use debt.
7. Bank Business Loans
If you’re borrowing for a business purpose, a bank or other traditional lender can be your best option.
You might get a better rate borrowing against your home or from a friend — but if things get tough, you could lose your home or your friend.
Also, a business lender is likely to notice flaws in your business plan or projections — which might save you from serious trouble.
8. Family and Friend Loans
If you have a good purpose for the money and a solid repayment plan, borrowing from family and friends makes sense.
You’ll avoid loan fees and get a lower interest rate.
Put it all in writing and pay at least the current Applicable Federal Rate, so your lender doesn’t have tax problems. The IRS will tax the lender based on at least that rate.
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