Considering taking on some debt?

joyfulguyFebruary 7, 2011

If it's borrowing to pay your current costs of operation - my suggestion is that you forget that.

If you can't pay your way now ... how are you going to afford it in a few months' time ... along with paying interest on the loan ... plus paying the loan down?

If you're planning to buy something of ongoing value, e.g. a home, investments, saving for your kids's extended education, your retirement plan, etc., there may be some value in it. A car is somewhat questionable, especially if it's a new one, as they lose value so quickly.

We've become used to dealing with low interest rates in recent years, both personally and in terms of our governments' operations.

Not only has the U.S. government (and the Canadian) racked up huge increases in deficits in recent years, but their ongoing debt has grown huge, as well.

Their debt is not mainly in-country, either - the lenders are mainly foreign and, in the case of the U.S., largely in China. If you'd asked some of the traditionalists in the U.S. about 30 (40?) years ago, when they had little dealings with Communist China ...

... how they'd like to be hugely in debt to China, and it being their largest lender, what kind of an answer do you think that you'd have gotten?

With our governments (and we as people) sporting that kind of money management and credit history, how enthusiastic do you think their current lenders may be to receive requests for further loans?

Not only that ... it is well known that the U.S. has been printing money in large quantities recently. And it continues to do so.

That will result in the value of that currency deteriorating.

Consider this: if suddenly there were to be double the number of dollars floating around ... don't you figure that soon the loaf of bread that used to cost a dollar ...

... will be priced at $2.00?

If someone deep in debt ... and spending more than s/he's earning ... goes back to the bank for another loan ...

... don't you think that the bank is going to demand a larger interest rate, or tell the borrower to forget it - that they don't want to lend any more?

You may be interested in some letters that I got from my stockbroker a few years ago, when I had a loan with them.

__________________________

"May 12, 1980, To our clients, Margin interest rates ...

"Effective May 13, 1980 interest will be charged at the rate of 17 3/4% on Canadian fund debit balances and 19 1/2% on U.S. fund debit balances.

"The interest rate on credit balances on Canadian remains at 13.5% and in U.S. funds will change to 15 1/2%.

__________________________

If you are currently paying 3% or so ... how would you be able to manage were that rate to change to, say 6%?

Or supposing that it went to 10% - how would you like to be required to pay 1/10th of the face value of the loan annually ... and that just to pay the interest, before you reduced the amount of the loan by a single dollar?

My earnest suggestion is that you consider such prospects seriously before you consider taking on substantial debt, our current fiscal ituation being what it is.

ole joyful ... thankful to be, after several years of retirement and in good health, comfortably solvent

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joyfulguy

What, no comments?

When I posted a thread about this thread over on "Kitchen Table" forum, which I visit often ... it produced about a dozen comments.

ole joyful

    Bookmark   February 24, 2011 at 5:47PM
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LuAnn_in_PA

Maybe no one on THIS forum is "Considering taking on some debt"...

    Bookmark   February 24, 2011 at 8:42PM
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joyfulguy

Hi luann in pa,

I'm not thinking of taking on debt at present, either - my message was, so to speak, a public service announcement.

I do, however, carry a line of credit at the bank, which I haven't used in years.

As a personal financial advisor for a number of years, I recommended to clients that they have money available on hand to cover 3 - 6 - 9 months' income in case it got interrupted by illness, layoff, or whatever reason ... and probably a year's worth, if they were in commission sales or another area of employment that was at risk.

I didn't have such myself, a good part of the time, as I have a couple of credit cards that I seldom use ... but available in case of emergency.

And I'd plan to pay off the emergency bill covered by the credit card in full on the first billing, from the line of credit, then pay that loan off within a short period.

By the way, I seldom use credit card for online purchases, and that only to agencies in which I have full confidence, e.g. "Canadian MoneySaver" magazine, CAA, etc., but I recommend that people who do, have one credit card that they use for such and insist that the credit card issuer keep their credit limit low on that card.

ole joyful

    Bookmark   February 25, 2011 at 2:15PM
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colorcrazy

We just brought a new sofa. We are getting old, with the accompanying back problems, so we needed something with good support. I asked if they gave a discount for cash, and they said no. DH told me the credit cards will not allow companies to give discounts for cash any more. So we charged it and will pay in full when the bill arrives. Since the credit charge is built into the purchase price, might as well hang onto my money for another 25 - 30 days.

    Bookmark   February 26, 2011 at 11:35PM
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LuAnn_in_PA

"DH told me the credit cards will not allow companies to give discounts for cash any more."

Actually, I think he got that backwards.
Companies cannot charge MORE if you use credit.

You CAN get cash discounts...
but not many stores in my area give discounts for cash either.

    Bookmark   February 27, 2011 at 5:47PM
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Billl

"I didn't have such myself, a good part of the time, as I have a couple of credit cards that I seldom use ... but available in case of emergency.

And I'd plan to pay off the emergency bill covered by the credit card in full on the first billing, from the line of credit, then pay that loan off within a short period. "

And you are advising other people on their fiances? Credit cards aren't emergency funds. You can't "pay off" credit with other credit.

Maybe we need a new law that financial advisers need to disclose their personal finances to clients. After all, you wouldn't pay for advice from a personal trainer that was obese, would you? Why should someone pay for financial advice from a broke person?

    Bookmark   February 28, 2011 at 9:51AM
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feedingfrenzy

Actually, it's a GOOD time to take on long-term debt, provided it's at a fixed interest rate, because interest rates are still very low and almost certain to rise in the future. We're probably going to see significant inflation in the coming years, which means that those carrying low-interest debt will be in a position to pay it back with cheaper dollars.

    Bookmark   March 3, 2011 at 1:23PM
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joyfulguy

Hi Billl,

Though I drive a car that's more than 1/4 my (rather advanced) age ... I'm not broke.

My money's hard at work, elsewhere. And I prefer not to cash in some of those instruments to cover an emergency, when I consider the cost of sale, paying tax on capital gain, then the frictional cost (commission) of re-buyiing in a number of months after I'd done some more saving.

I call that making the credit card work for me, rather than letting myself become its servant.

The part that I don't like about using the line of credit to pay off the credit card balance owing is that the interest isn't deductible.

Actually, in recent months I've had more than enough cash on hand to cover almost any potential emergency, but have been worried about making further investments, figuring that the markets are too high and probably about to slide some.

I had to pay over $800.00 to fix another guy's car after an accident a few months ago, and over $600. to fix mine (blew a brake line when I braked harder than usual) and paid it all out of ready cash on hand (with more to spare).

But - part of the advice that I give (and try to follow - more or less) is to make regular investments ... that way, when prices are low, you get more shares for the same amount, and later, when prices are high, you get fewer ...

... so your average price is better.

Trying to time the market - which is unwise, most of the time.

It's rather easy to say, "Do as I say ... not as I do", right?

ole joyfuelled

    Bookmark   March 3, 2011 at 5:58PM
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