4 Times It May Pay to Go Into Debt
By Maryalene LaPonsie
Debt is a four-letter word of the bad kind, according to some people. The type of thing that shouldn't even be considered by responsible adults. However, not all finance professionals agree debt is something to be avoided.
"Not all debt is created equal," says Gary Poch, vice president of global consumer services for Equifax. "There may be some types of good debt."
Specifically, experts told U.S. News it may pay to go into debt for one of the following four reasons.
Reason No. 1: To Buy a House
For many people, home ownership is only possible through debt in the form of a mortgage. The average cost of a home sold in November 2015 was $374,900, according to the U.S. Census Bureau. That price makes it impossible for many U.S. families to pay cash for property, unless they save for years or even decades.
That's not something people should have to do, says Finder.com CEO Fred Schebesta. "I'm a big believer in saving money, but it's better to do some things while you're young," he says. Rather than waiting until the kids are grown and there is cash in the bank, taking out a mortgage at a younger age can improve a family's quality of life.
Beyond that, a house is an appreciating asset that will grow in value over time. As a bonus, interest payments made on a mortgage can be included in itemized deductions for federal income taxes. Together, these factors add up to mortgages being a smart debt choice for many people.
Reason No. 2: To Get an Education
Despite chatter in some circles about a looming student loan crisis, many experts still say debt for educational purposes can be smart. "It's an investment in human capital," says Eric Meermann, a certified financial planner and portfolio manager with Palisades Hudson Financial Group in Scarsdale, New York.
Meermann has personal experience with this type of debt. He took out loans to cover the entire cost of his education at the Stern School of Business at New York University. The debt has since been repaid, and it was money well-spent in Meermann's mind since it opened up the opportunity for greater income.
Data from the Bureau of Labor Statistics backs up the assertion that higher education equates with higher income. The following are average weekly incomes by education level for adults ages 25 and older in 2014, the latest year for which numbers are currently available:Less than a high school diploma: $488
- High school graduate with no college: $668
- Some college or an associate degree: $761
- Bachelor's degree only: $1,101
- Bachelor's degree and higher: $1,193
- Advanced degree: $1,386
Even Schebesta, who isn't sold on the idea that everyone needs a degree, says debt for training or a technical course can be a good investment if it will unlock greater earning potential.
Reason No. 3: To Start a Business
Schebesta feels confident that taking out a loan for business purposes can pay off. "I saved my first company by borrowing $50,000 to cover payroll," he says. He was in his early 20s at the time, and the move allowed him to regroup and later sell the business.
When small businesses need an inflow of cash, they typically either go into debt or raise equity through private investors. Although going into debt can be risky, particularly if the lender requires the business owner to be personally liable for payments, it can be an easier option than looking for investors who essentially become co-owners in the venture.
Reason No. 4: To Take Advantage of Low Interest Rates
The final reason why it might pay to go into debt is also a point of contention among financial experts. That reason is to take advantage of the current low-interest market.
"If you want to buy a new purse and are thinking about putting it on a credit card with 15 to 20 percent interest, that's probably not a good decision," says Brandon Moss, certified financial planner and vice president of United Capital in Dallas. However, it may make sense to get a car loan at 2 percent rather than pulling cash from investments that are earning 6 to 8 percent.
Meermann agrees it can be a smart move to take out a low-interest loan in order to let investments grow, but Poch isn't so sure. "I don't know that I agree with that advice," he says. Poch advises people to consider the term of the loan, the value of the car and how quickly it will depreciate before making a decision to finance.
Using Debt as an Investment
While these financial experts disagree on the details, they all agree that debt can be a useful tool, so long as it is used in a way that will generate cash.
"What are the things that are going to create wealth over time? What are the things that are going to deplete wealth?" Meermann asks. Going into debt for the former – for houses that appreciate or a degree that could land a higher-paying job – can be smart while debt for the latter can be bad news.
Still, people should carefully consider their financial situation before going into debt. A high debt-to-income ratio can reduce a person's credit score and may make it difficult to repay obligations. As Poch notes: "All debt can be bad if you don't pay on time.