Smart Money: Here’s When Borrowing Money Makes Sense

The more you understand about smart money and how to juggle available assets to pay off high-interest debts, the better you'll be in the long run.

Photo: Zac Johnson, Online Marketer and Creator of Zacjohnson.com; Source: Courtesy Photo

Whether for business or personal use, deciding when to borrow money is a decision that business owners regularly have to consider.

It’s not just a matter of how much money you need to borrow, but also how the money will be used. As Business Insider points out, even if you aren’t able to get a traditional loan, you can still find ways to borrow money and minimize the cost of borrowing in the process.

There are various ways to access money in lean times. So it’s important to learn how to get your hand on money and become smarter about where and how to spend it.

Let’s get started.


When borrowing money makes sense

One of the easiest ways to borrow money is with a 0% promotional credit card, credit lines, or balance transfers. These offers are commonly sent to cardholders who have substantial credit lines and good credit scores in the form of a paper check you can deposit at your bank.

Credit lines can come in handy since they often come with a 6, 9, or 12-month interest-free tickler rate. In short, this means you can take out a $10,000 credit line and not pay any interest on it for the first 12 months. Yet, you may have to pay a 5% up-front fee.

Photo: Karolina Grabowska, Pexels
Photo: Karolina Grabowska, YFS Magazine

However, if you already have debt that is owed elsewhere with a higher interest rate, it makes perfect sense to pay off your high-interest loans in the interim.

Before you sign on the dotted line, keep these tips from Investopedia in mind.

  • Credit card companies make money not only from interest but also from merchant swipe fees, called interchange when purchases are made.
  • Consumers who opt for a 0% transfer should understand that the interest-free period is only for a limited time.
  • Banks track these offers and know the odds of consumers paying off their balances in full before the promotional period expires are in the banks’ favor.


Paying off pesky student loans

If you’ve enrolled in an undergraduate or postgraduate program at some point in your life, you’re probably still paying off some kind of student loan associated with your furthering your education.

The crazy thing about attending college and student loans is that so many of us signed off on financial documents and knew very little about the gravity of doing so. At the time it sounds like a good idea to pay off your student debt later, but many people end up struggling to pay them off later in life.

According to the recent interest rate data on student loans, you could be looking at 2% APR for variable rates and 4% to 5% APR fixed rates. This depends on the length of your loan, credit history, and co-signer. But if you can access college funds at a lower rate than your current student loan rates, it would definitely make sense.

Much like a home mortgage, student debt is paid at regular intervals, with a small portion going to the principal and a much larger goes to accrued interest. Consult with a financial adviser, and review your statements to see where you might be able to borrow money at a lower rate to pay down your existing loans.


Investing in your company

Depending on your industry, the initial costs of starting a company can be capital intensive or low-cost. For example, if you plan to start an online marketing business or e-commerce site, you could pay less than $500 for a site, web hosting, and some marketing. On the other hand, if you launch a robotics company, you might need six to seven figures. Both situations require an out of pocket expense.

The startup funding decisions you make often set the trajectory for your company in the future. A perfect example is bringing on an investor that funds a $10,000 investment for a share in equity. If you give up 10% and grow a million-dollar company, that $10,000 loan now costs you around $100,000. In this scenario, it could make perfect sense to borrow money with set fees and costs if it is more advantageous than raising venture capital.

If you’re unsure how to fund your business, the SBA website is full of useful information and resources.


Balance transfers for high interest rate credit cards

Credit cards that offer no or low-interest rate introductory offers are great, but not always available. Outside of these promotions, credit cards can come with terrible 20% APR interest rates.

Photo: Karolina Grabowska, Pexels
Photo: Karolina Grabowska, YFS Magazine

If you’ve accumulated credit card debt, it can require a tremendous effort to pay them off. If you’re paying a 20% interest rate on credit cards, it may be in your best interest to borrow money at a much lower rate. If you have multiple credit cards, consider a balance transfer between cards to save money in the process. A balance transfer allows you to move high-interest debt onto a credit card with a lower rate — often 0% for well over a year.


Invest in financial knowledge

When you look closely at your financial picture and where you can save money, you’ll find opportunities to improve your financial future.

The more you understand about smart money and how to juggle available assets to pay off high-interest debts, the better you’ll be in the long run. As Benjamin Franklin once said, “An investment in knowledge pays the best interest.”


Zac Johnson is an entrepreneur with more than 20 years of internet marketing experience and branding. Follow his blog at ZacJohnson.com.


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