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When is it a good time to borrow?

Don’t get a loan to invest or pay off mortgage

  • By Cleofe Maceda, Senior Reporter
  • Published: 21:00 February 24, 2013
  • Gulf News

People borrow money for various reasons. Some resort to personal loans to pay for things their bank balance can’t afford. Whatever the reason, never borrow to invest in the stock market and mutual funds , among others.

Chances are that any profits you will gain from your investment will be outstripped by the high interest charges on your loan. “You have interest to pay on the loan which is probably going to be bigger than any gains you can make on the investment,” says Steve Gregory, managing partner at Holborn Assets. Here are other situations for which you may or should not take out a personal loan.

Make a down payment on a house

You may decide to run to the bank if you don’t have enough cash to make a down payment on a house and lot. Gregory says this is “probably not” a good move, “unless there is no other option.”

“But this is really a bad idea. If prices fall, you owe the mortgage and the deposit, and you will struggle to sell.”

Pay a mortgage

Avoid taking out a personal loan to pay off a mortgage because the rates are double or five times as high as mortgage-backed lending,” says Gregory.

Go on vacation; throw a party

If you were to borrow money to go on vacation, it may not be a bad idea if you can repay it within a short period. “You need to be repaying it inside one year.” The same is true for throwing a wedding party or a special birthday. “Again get it repaid within a year,” says Gregory.

Start a business

Among the points listed above, this is the only justifiable reason to borrow money, according to James Thomas of Acuma. “Start-ups often need capital to get under way,” he says.

Settle credit card debt

Borrowing money to pay off your outstanding credit card dues can be useful, but only if you can get a lower interest rate and you are actually saving money, Thomas says.

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