Going into debt is, at best, a decision that should be made with caution. However, there are certain situations where it’s necessary or beneficial. One guideline if you have to go into debt is to avoid loans longer than the product you’re buying will last.
Picture: Jeff Ferzoco/Flickr
The longer you’re in debt, the more you’ll have to pay in interest, which can ultimately end up costing more than the thing itself. While the interest may be worth it on something like a reliable car or a home, it’s probably not worth it for something like a pair of shoes or this year’s newest smart device. As personal finance blog One Cent at a Time suggests, if the length of time you’ll be in debt exceeds the amount of time you’ll be able to use the item, it’s probably not a great idea:
[D]o not borrow money for something too extravagant especially if it will take too long for you to pay back for it. The debt and stress incurred for that specific purchase will not be worth it. If you have to borrow, match the repayment term to the life of that purchase.
Of course, that the inverse isn’t always true: just because you’ll use an item for longer than you’ll be in debt, doesn’t mean that it’s worth buying. For example, you could still overspend on a TV or a car, pay it off in six years, and still be using it later. You should still weigh your purchases based on what you can already afford. However, this is one very helpful red flag.
How to Reduce Your Debt from Being Financially Indebted [Once Cent at a Time]
Comments
2 responses to “Don’t Borrow Money For Longer Than The Thing You’re Buying Will Last”
Heh. This excludes weddings and vacations… and thus I approve.
The technical term you’re looking for is depreciation. With things like a house its usually worth more than the total interest paid by the end of the loan, but if you get a loan on a depreciating asset like a car or TV, you’ll end up paying way more than its worth, and by the end of the loan the asset is worthless.