Think Before You Borrow–Key Considerations

It is important that you go through a series of steps before deciding if you should borrow money. Here are the steps:

  • Look at all the options available to you. What's least expensive? Using money in a savings account? Selling an investment? Or borrowing the money?
  • Can you afford it? What does your current loan situation (including credit cards) look like? If you are already heavily in debt, you may want to reconsider borrowing and wait until you are in better financial shape.
  • Consider potential tax benefits. If the interest you pay is tax-deductible, it reduces the net cost of borrowing. The IRS disallows almost every type of interest expense deduction, except for some interest on home loans, investment interest expense and possibly some interest on student loans. So, if you are a homeowner with equity in your home, there may be a tax benefit associated with mortgages and home-equity loans.
  • Evaluate your attitude towards borrowing. Learn to use debt wisely. You shouldn't go into debt to live for today and then pay tomorrow. However, it doesn't make sense to avoid debt entirely. If your borrowing cost is 4% and you can earn 6% on your investments, it could make sense for you. When used wisely, borrowing can be a useful tool to reach your financial goals.
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