MP Dunleavy writes a column for MSN Money and yesterday asks the question, When is it OK to take on debt? She starts off by pointing out that interes rates are hitting rock bottom, credit is starting to flow again, and people are being urged to refinance.
She admits she just got out of debt and is building up her emergency fund. But a lot of unexpected expenses like car repairs and home repairs have hit them recently. She was considering borrowing $8-10k to fix repairs to their house that are needed like a chimney repair and sunroom repair. Part of the problem is the chimney repair is a must to prevent structural damage and the sunroom is implied that without it could cause water damage costing a lot more if they waited. So she wonders are home repairs worth it? Then they were hit with their car not passing inspection and the possibility of needing a newer car.
So when is debt okay?
My opinion is that debt is okay when it’s absolutely necessary. First if you needed emergency medical care and insurance wouldn’t cover it, or will after you submit. I would definitely charge an emergency room visit if necessary. You can’t put a price tag on life.
Second, for home repairs, I would absolutely do it if it compromised the integrity of my home. For instance, two winters ago our pipes burst in our kitchen from the cold. We had the cash to pay for it to be fixed right away, but if we didn’t I would consider that an absolute necessity and would have taken on debt to pay for it.
I think things like furnace dying in winter a necessity. If you can’t heat your house and the pipes burst well there is more damage done. Same with a leaking roof, chimney that supports the house, water heater dying, fridge or stove replacement. Water damage can end up costing more in the long run than just repairing it immediately, speaking from experience. Sure you can live without a stove and fridge, but you may eat out more and pay more for groceries daily instead of shopping sale, than if you had just bought a stove or fridge and kept on cooking at home. So I would take on debt if it would impact my life and potentially cost more.
Would I take on debt for a car? Maybe. A car can be a necessity in some lines of work and even getting to work if there is no public transit or you only one family car. Right now is not the time to be showing up to work late or not driving to your clients as much. But I wouldn’t go out and get a $20k car loan. I might get a $1k car or a $3k car to drive for 6 months until I had time to save up more money and find a decent used car. So again I think debt might be okay depending on the circumstances.
I also think mortgages are necessary because I live in an expensive area. It doesn’t make sense to rent for 30 years while saving up the cash for a home. Renting is expensive, then saving an addition say $2k/month is not going to happen. Maybe if I lived somewhere that homes were less than $200k.
So is it ever acceptable to take on debt? What are your guidelines and what should MP do?
14 responses so far ↓
1 SavingDiva // Apr 23, 2009 at 9:39 am
I think MP just likes to make herself feel better about taking on unnecessary debt. However, I’m not totally against debt (just annoyed by MP). I think it’s reasonable to take on debt to purchase a car…however, I am going to try to avoid doing that for my next car purchase. I am also going to take on a massive amount of debt from a mortgage very soon
I also think student loans are necessary in some cases, but I think it should be done in a reasonable manner ($100k in loans for a teacher is ridiculous).
2 JoeP // Apr 23, 2009 at 11:01 am
I don’t like debt and avoid it when at all possible. For major acute issues, some of which are mentioned above, it is good to have a line of credit to address the problems and prevent them from becoming bigger problems. Then pay it down aggressively. But for other longer-term items such as a new vehicle, minor home repairs, emergency travel, and the like, it makes good sense to establish a liquid account so that neither the EF nor a line of credit would have to be used.
3 bogart // Apr 23, 2009 at 11:01 am
I’d add to your list non-emergency medical care. Of course if it’s a chronic/recurring condition, the budget needs to be adjusted to accommodate it (and either way, there needs to be a plan for paying off the debt), but many medical conditions that aren’t emergencies still benefit from being seen to sooner rather than later. Also, the layperson isn’t always qualified to judge what constitutes an “emergency,” so at a minimum getting medical advise on what can be postponed and what can’t seems advisable.
I got no words of wisdom for MP.
4 Meg from FruWiki // Apr 23, 2009 at 2:34 pm
I don’t that it’s ever “o.k.” because ideally you should have other options, but in the real world it does make sense 1. when you need something critical and really don’t have any money (like AC in a Florida summer if you’re as heat-sensitive as I am) or 2. it WILL 99% sure will save/make you money.
1. People do mistake needs for wants and there is a certain tolerance level. There is a fine line. No AC in New York, big deal. AC in Florida summer — sorry, not doing without.
2. People are sometimes too optimistic about investments. For goodness sakes, don’t get into debt to invest in your crazy uncle’s real estate scheme. However, higher education MIGHT count — assuming that the degree won’t cost more than it is really worth and that you’re going to be able to use it. Going to an expensive private school to get a degree in social services — while somewhat laudable — probably isn’t a smart move.
Of course, ideally you cut back wherever you can before going into debt. I say this, admittedly, as someone in debt and trying to get out (though while still trying to enjoy life and spend according to my new priorities). Learn from my past mistakes, y’all!
5 LAL // Apr 23, 2009 at 10:56 pm
I think JoeP this is for those who don’t have an EF or are getting out of debt. Whether they should take out more debt before they are able to really build a cushion? Is it ever necessary to go back in debt?
6 Kristy @ Master Your Card // Apr 24, 2009 at 12:18 am
Getting into debt to protect an asset is not necessarily a bad thing. Getting into debt to satisfy a desire of instant gratification is. If there are home repairs that could damage the structure of the house, then I think it’s fine to take on debt to save yourself money down the line.
In terms of getting a new car, I don’t necessarily think financing a car is a bad thing. It can be a bad thing if you’re just trying to show off a big flashy car that you couldn’t possibly afford. But, if you’re being reasonable in what you’re borrowing and what you’re buying, then I don’t think there’s a problem with that. Although, I do think you should pick a car that holds it’s value well.
The key to any debt you take on is handling it responsibly. Prior to taking on the new debt, you should sit down and figure out a repayment plan and consider all of your options. But, it’s probably unreasonable to assume that you won’t ever use debt again when you don’t have an emergency fund in place. Home repairs, car issues, all that stuff costs money. If you’re not prepared for it, then your option usually falls to financing it. Again, not necessarily a bad thing, but definitely something you want to be cautious with.
7 tom // Apr 24, 2009 at 8:14 am
All I gotta ask is she owns the home, why doesn’t she have at least 5 or 10k saved up for emergencies?
Did they not account for any repairs or maintenance coming up while living at the home?
Sure you can say debt is ok but how long will it take you to pay it back and at what additional cost (not just interest, opportunity cost too).
8 frugal zeitgeist // Apr 24, 2009 at 8:39 am
I think this is the inevitable result of bad planning. Part of being a homeowner is planning ahead for repairs or timely maintenance, and that means setting aside money especially for that purpose. Dunleavey obviously didn’t do that, and that was a tremendous lack of foresight on her part.
Anyway, it is what it is. I think she should make a list of all of her outstanding costs, prioritize them, and capture all of the what-ifs involved with postponing them until she can afford them. If the cost of the worst case scenario (postponing and having something bad happen) is higher than the cost of borrowing *and* there’s at least an average probability of the worst case scenario occurring, then she’ll have to borrow and be done with it.
Hopefully, she’ll learn a little something about planning for home maintenance costs ahead of time.
9 JoeP // Apr 24, 2009 at 9:58 am
LAL: water under the bridge. I would hope that people don’t get into debt in the first place, and are able to set up an EF and a house maintenance fund. Those who are in debt such that this is prevented from happening, have unfortunately made (IMHO) bad decisions and are now in that proverbial tight spot that requires yet MORE of the debt that put them there in the first place! While not for everybody, I’d dial back on unnecessary expenses until cushions become established.
10 Meg // Apr 24, 2009 at 4:49 pm
There’s also something to be said for what rate/terms come with the debt. If the only debt you can get is at rates above 20%, for example, it’s much harder to justify ANY use of it.
On the other hand, I am not paying extra on my mortgage since the rate is fixed at 4.75% – nearly a 3.5% effective rate after taxes. That will probably be about what inflation is over the next 30 years, so technically I’m barely even paying interest. Do you know how small my $605 mortgage payment is going to seem in 10, 20, 30 years?
And if you can get 0% on a credit card, why not use it and instead of paying it off, accumulate savings? I’m doing that now too.
And even if I had the money for a car (and needed one of course) I’d finance it if the rate was 5% or below, if I could easily afford the monthly payments. That would free up my chunk of money to be invested in tax deferred retirement accounts (which I’m currently not yet maxing out), which would hopefully compound to earn over 5% over the decades.
To each her own, though. I ALWAYS want to have enough cash on hand that I can pay off that kind of “optional” debt at any time.
11 Meg from FruWiki // Apr 24, 2009 at 4:58 pm
I agree with the other Meg that interest rates do matter. For example, my interest rates are pretty good, so I feel better about saving up an emergency fund at the expense of some interest right now.
However, even 0% interest can be dangerous if you end up spending more than you would have otherwise or don’t set aside money to pay the debt off when the rate goes up.
12 LAL // Apr 25, 2009 at 12:17 pm
I agree that a lot of repairs are normal on a house or car. But unfortunately most people don’t plan about these expenses and find themselves in the boat MP is in.
But the question arises should they take on more debt? The debt they already are in from the mortgage is a sunk cost without an EF.
I think interest rates do matter. I also think that why you want the debt. A fancy car? Or a used $10k car loan? Big difference in my book.
Also big difference, roof leaking and chimney about to fall down? Fix. Chimney unsightly, don’t fix.
I have friends whose house burned down from a chimney that caught on fire. Thankfully no one was hurt. But some repairs are better off done than put off.
13 fengshui // Apr 27, 2009 at 11:58 pm
I don’t think that debt is a bad thing, especially if the interest rate is low. I don’t think that student loans are “bad debt”, I see them as an investment. Same with a mortgage, or even a HELOC if you’re remodeling. Im too antsy to spend 5 years saving up $20k to remodel my ugly kitchen. If I can get a home equity loan for 4%, I’d do that. I’m frustrated because refi rates are so low, and I’m still paying 6.5% for my home loan, but I can’t refi because I’m still job hunting post grad school graduation!!!! Grrrr. I can’t refi without verifiable income! I’m working per-diem now, but it isn’t “guaranteed” on paper….
14 LAL // Apr 28, 2009 at 9:26 am
It depends on how necessary it is. If it saves you move money to redo the kitchen to make it usable then you might save more in the long run rather than eating out because the kitchen isn’t usable.
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