You might have heard about the dangers of borrowing money. Usually, when people talk about borrowing money, they are referring to short term loans. These loans often have massive levels of interest, hidden costs and can be designed to cause debt. For instance, let’s say you borrow about one hundred pounds to pay off a few of the month’s bills that you can’t afford. Even with new measures in place, you could still be expected to pay two hundred back to the lender. You can see then why these loans have developed a poor reputation in the media. But that doesn’t mean that all loans are dangerous. In fact there are many ways that borrowing money could ultimately help you.

Borrowing money doesn’t always result in someone ending up with a massive debt that needs to paid off. It can also be used to pay off a debt or rebuild a credit history. You can even find that loans are vital when taking on larger, more expensive purchases.

Let’s not forget that there are multiple times throughout the year when taking out a loan is necessary. Some of the best examples are purchasing a house or paying for college tuition fees. College fees and homes can cost hundreds of thousands of dollars. Most people won’t have that type of money secured in the bank. Their only option is to take out a loan. So, let’s look at some of the ways loans can be beneficial and how to avoid bad loans.

Consolidation

If you have a large amount of debt building up, you may think about taking out a consolidation loan. Consolidation loans are useful when your debt is coming from multiple sources rather than just one area. For instance, you might owe money in rent, but you could also have taken out a payday loan. Then, there might be a credit card bill. When you have this many debts, it can be difficult to handle them effectively and pay them off. You might be able to deal with one but as soon as you have, another rears it’s ugly head. It feels like trying to kill a hydra. Pay off one debt and two more seemingly grow in its place.

A consolidation loan may not sound like a loan at all at first. Basically, you can push all your loans into one sum. You will then be able to pay it off with more ease and stop the amounts becoming overwhelming. You may also find that the amount you owe is lowered because some of the cost is cut away. If you think there’s a catch here, you’re right. When you take on a consolidation loan you are borrowing money from another lender. You use that money to pay off the debt that you have accumulated. Or, rather they do it for you. Once this happens, you then only owe money to the final lender with a little debt management. The amount you owe should be less than you would be paying if you still had multiple debts. However, it is important to understand that these lenders are not charities. While they can help people in debt, they are a business. They are looking to make money, a profit. The only way they can do this is if taking on your debt is financially beneficial for them.

So while consolidation loans can be helpful, you need to do the math yourself. Work out how much you would be paying with each deal. You should do this before you take on a deal offered by a consolidation company.

Fixing Your Credit Rating

The other way a loan can be beneficial is because it can fix your credit rating. You might not even be aware that you have a credit score but you do. It’s a rating based on how well you pay off money that you owe. For instance, if you have struggled with paying back loans in the past you will have a poor rating. You might also finding your credit rating is poor if you don’t pay bills on time. Or, if you have a costs mounting up on your credit card. The good news is that your credit score is only effected if you pay back the amount you owe late. There will always be a deadline for payback on whatever you borrow. If you go over the deadline your score will drop. This ultimately means that if you payback on time, your score won’t be affected. In fact, by paying back within the time limit you can actually fix your credit score.

This is another way loans can be useful. The best way to do this is by taking out a loan that you know you can afford. Pay it back within the time limit, avoid the awful rate of interest, and your credit score is fixed. One year of good credit will put your score back in the green. Although you always need to start by getting rid of your existing debts.

Avoiding Any Debt

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Loans can also be used to avoid debt. There are rare scenarios where by taking out a loan you can avoid ending up in debt at all. This might seem like a paradox but it’s not really. In fact, you just need to make sure that the loan you take out pays off the amount you owe. As long as you can pay the second loan back before the interests rises to an unpayable amount it can be beneficial. Although, you do have to examine the possibility that this can lead to a debt spiral. A debt spiral is where one loan causes you to take out another that worsens the debt. It’s a risky situation to be in and one that should be avoided. The trick is making sure you are always checking the costs before you borrow. Don’t forget if you borrow from reputable loans you should be able to find out exactly how much money a loan will cost before you can pay it back.

Living Over Your Means

There are a lot of people who use loans to essentially live over their means. You might think this is a recipe for a debt disaster and it can be. If you are in this position you certainly won’t be saving any cash. You could, however, pay for little luxuries without pushing yourself into debt. As already mentioned, if you can pay a loan back on time, it’s not damaging your finances at all. It could actually have the opposite effect of improving them. At least in the short term, and if you are happy to live like that there’s no reason you can’t borrow. There are plenty of people who spent the whole year worrying about the future when really they should be thinking about the present.

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It’s all very well to say that you shouldn’t live carelessly now. But it’s also true to say that you could die tomorrow. If you want to live past your means now, borrowing is the only way you can do it. For this reason, it’s hard to say loans as a pure negative. They can lead to positive results by allowing people to buy and experience things that they wouldn’t otherwise be able to.

Yes, this can lead to debt and it will in some cases. But it’s important to understand that not everyone who borrows will ultimately end up in debt. There are plenty of individuals who can borrow without falling down this rabbit hole.