If you end up getting a loan, make the payments on time. If your payment is late, the lender will usually report this to a credit bureau; everyone looking at your credit report will know. If you mess up two or three times in one year, it looks really bad.
If the loan has no early repayment penalty (can you believe you’d get in trouble for paying back someone too soon?), pay it off as rapidly as possible. Even with an extra $10 in each payment, you’ll pay it off much faster and save interest. If you have money in a bank account and you don’t need it for a couple of years, use it to pay off the loan. Then deposit your monthly loan payment into your bank account instead. You’ll be the one earning interest on the payments instead of the lender.
The only time buying on credit is a smart investment is when the thing you buy will increase in value. If the amount of its appreciation (increase) is greater than the cost of the loan, then it may be worth borrowing for. Here are some instances where borrowing may be wise:
BUSINESS INVESTMENT
Let’s say you’re really good at desktop publishing. You know you could produce flyers, brochures, and newsletters for several clients if you could buy a computer and software. If your business plan shows that you could afford the interest on a loan and still make a healthy profit, then borrowing money may be a smart business investment. Depending on your tax situation, the interest on such a loan may be deductible as a business expense.
EDUCATION
A good education is an investment in your future. If you need to borrow money to get one, then the interest on the loan is a part of the investment. Student loans allow you to postpone repayment until you’re out of school and in a job. At the same time, a loan is a loan; if you run up a big bill, you’ll be paying for it long after you’ve forgotten how much fun those all-night study sessions were.
REAL ESTATE
The right piece of property in the right location for the right price will go up in value even after interest and inflation. Real estate investments generally require a hefty down payment, a steady monthly income, and several years to appreciate significantly—all factors that make it difficult for teenagers to invest.
I know my no-borrowing advice is a lonely call in this world where debt is the American way to buy things. But just because most people borrow money, it doesn’t make it right. With very few exceptions, borrowing money is just plain stupid. If you can’t figure out a way to buy something without going into debt, you’re not thinking hard enough. Or you want something that’s too expensive.
Your budget and money-management tools are your best hope of avoiding this awful trap. Don’t borrow against your future to pay for what you need today. Instead, start saving today to pay for your future. I promise you, when your future arrives, it will thank you for it.
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