This story originally appeared on The Penny Hoarder.
A scam.
This is what the financial writer Robert kiyosaki calls for joint advice to get out of debt.
Of course, it is not conducive to larger credit card balances. He advises borrowing to buy structuring assets, such as rental property.
Many financial experts distinguish between “bad” and “good debt,” the latter referring to investment and commercial debt.
But the definition can be a bit limited, as there are several good reasons for borrowing money. They understand the following.
Make money in various ways
Borrowing for investment and business purposes are obvious examples.
But good debt can also include school debt that leads to a diploma, increase income for life. If getting a car loan is the only way to make it work, that may also be a good reason to borrow.
Save money in various ways
Good debt can also include borrowing for purposes that help you save more money than the costs of debt.
The most obvious example is borrowing to buy a house when it is cheaper than renting. Another example is borrowing to insulate an attic, reducing heating bills in the long term.
To cover emergency expenses
It is a delicate area. A lot of “emergencies” can be avoided – in theory.
For example, you know that you will eventually have a car repair. You could save for this, rather than letting it become an emergency that requires you to get into debt.
On the other hand, borrowing for critical (and unpredictable) medical care is an example of good debt, and often necessary.
The worst ways to borrow money
Obviously, there are times when you should be in debt.
But in order to borrow smartly, you also need to consider how you are borrowing.
When you have credit card debt, you pay more for everything in interest charges.
If you can afford loan repayments for a car, boat, or vacation, you can afford to save for those instead. Why add interest to the cost?
In general, consumer debts are all “bad debts”.
But even when you have a good reason to borrow, some ways of doing it are worse than others. Here are some of the worst ways to borrow money.
Payday loans
“On average, payday loans have an APR of 391% (annual percentage rate),” about 100 times higher than mortgage rates, according to the Center for Responsible Lending.
And since the average borrower does so many transactions annually, it is unlikely to be a true emergency loan.
Even the next option on our list is probably better than a payday loan.
Pawn shop
According to state regulations, annualized interest rates for pawn shops can reach 240%, Nolo.com emphasizes.
Rather than borrowing against things you value (and risking losing them), find things you no longer need and sell them to raise the money you need.
Cash advances by credit card
the average interest rate on credit card cash advances is 24.24%.
It’s better than pawn shops and payday loans, but it’s more than history. The cash advance fee is often 5% of the amount borrowed.
A three-month, $ 2,000 credit card cash advance with 5% upfront plus 24% interest has an effective annual rate of close to 44%.
Credit card
Putting what you need on a credit card is better than getting a cash advance.
There is no additional charge and the average purchase interest rate is 6% lower. Of course, you should always avoid borrowing at 18% interest as much as possible.
Smart ways to borrow money
Good debt improves your life in a lasting way, usually by increasing your income or reducing your expenses.
But even for a good cause, you don’t want to pay too much for the money you borrow.
Fortunately, there are many affordable ways to borrow, and one of the following is likely to be right for you.
1. Social loan websites
Peer-to-peer lending platforms like Lending Club and Prosper allow you to borrow large amounts (up to $ 50,000 on Lending Club) from groups of people who each invest a little in your loan.
Interest rates start as low as 5.32% and go all the way up to 35.97% on Prosper. But the loan origination fee (up to 5% upfront) increases the actual cost.
P2P websites allow you to borrow money for just about any reason.
For example, you could save money on existing debt by getting a consolidation loan at a lower interest rate, but be sure to calculate all the costs.
The Lending Club also offers small business loans up to $ 300,000 at rates as low as 5.9%.
2. Alternatives to cash advances
See my article on five alternatives to expensive cash advances for ideas on how to strategically borrow when you need a short term loan.
3. Residential mortgage loans
You can get a standard mortgage (new or to be refinanced), a home equity loan, or a home equity line of credit.
Compare these options is tricky, but they all have better interest rates than the previous alternatives. A line of credit is the most flexible, allowing you to borrow only what you need, when you need it.
It can be a smart way to borrow and buy income-producing assets, thanks to the generally low interest rates on home loans.
“Interest you pay on a mortgage on a house other than your primary or secondary residence may be deductible if the loan proceeds were used for business, investment or other deductible purposes,” the IRS Reports.
Talk to your accountant to make sure you get things right when you borrow for business or investment purposes.
4. 401 (k) loans
There is when it makes sense to borrow from your 401 (k) planlike when you have an emergency or need a car to avoid losing your job.
A big plus is that all “interest” goes to you, instead of a lender.
This assumes you repay everything as planned, of course. Otherwise, you are only sabotaging your retirement.
5. Student loans
Borrowing for college can pay off big, and many student loans have real advantages over other forms of borrowing.
They may have low interest rates and deferred payment options.
And if you are having financial problems, there is loan forgiveness options you don’t get on with other types of debt.
6. Real estate investment loans
Rental property financing has become more difficult.
But if you can find a bank willing to lend you money, the key thing to watch out for is: will you be making money every month after all fees?
Borrowing for investments that produce positive cash flow is one of the smartest ways to use debt.
7. Bank loans to businesses
If you are borrowing for business purposes, a bank or other traditional lender may be your best option.
You might get a better loan rate on your home or from a friend, but if the going gets tough, you could lose your home or your friend.
Additionally, a commercial lender will likely notice flaws in your business plan or projections, which could save you serious trouble.
8. Loans to family and friends
If you have a good goal for the money and a solid repayment plan, borrow from family and friends logic.
You will avoid loan fees and benefit from a lower interest rate.
Put everything in writing and pay at least the current Federal rate applicable, so that your lender does not have tax problems. The IRS will tax the lender based on at least that rate.
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