A lot of companies may be happy to lend you money. It's tempting when interest rates are fairly low. But it's not always the best financial decision.
Four dangers of borrowing too much
- It can become a habit One study looked at people who borrow more money by adding to their mortgage. The results showed that most of these people still had the same level of debt, or even more, two years later. The danger for these families is that they can lose their home if they can't keep up the higher payments.
- It takes away money from other important needs When you borrow money, you have to pay interest. That's money you can't spend on anything else - including things that could grow in value, like a home.
- It can damage your credit rating if you don't pay the bills If you fall behind on your bills, you won't be able to borrow any more money. You may also have to give back the goods you bought through borrowing.
- It can lead to high-interest payments that are harder to make The more debt you have, the harder it is to get a low interest rate when you borrow. So, you pay even more for borrowing.
Three situations where it's good to avoid borrowing
- Paying your everyday expenses You shouldn't have to borrow to pay your monthly bills. If you do, you are spending more than you are making.
- Covering optional spending You'll save money if you pay cash for extra costs like a new TV or a vacation. Many experts say borrowing makes sense only when you do it to buy something that can go up in value, like a home.
- Borrowing when you know you can't afford the payments The experts say you should never pay more than 35% to 40% of your gross income each month toward debt. This includes your mortgage, credit cards, and any other form of debt.
Remember: These days it's easy to borrow, but it may not be the best choice
It's not a good idea to borrow a lot thinking you'll just pay the minimum back each month. It may take a long time to get out of debt and you'll pay a lot of interest. Also, if you have one late payment, your credit rating may suffer.
Content in this section is provided in partnership with the Investor Education Fund, a non-profit organization promoting financial literacy to Canadians. To find out more go to GetSmarterAboutMoney.ca.