Yesterday WalletPop posted 10 Dumb Reasons to Take Out a Loan. Oh, how I like list posts. Ideas homogenized into orderly little chunks. It’s like blog dim sum. Or sushi. Or maybe Chicken McNuggets.
I am too much of a fussbudget not to point out that three of the listed items are not dumb reasons to borrow but dumb ways to borrow. Still, I think I can come up with ten easy-to-digest responses. Here goes.
1. Buying a Timeshare. I have to agree that buying a new timeshare, that is, from the developer, is probably always a bad idea. (On the other hand, buying one used, from some other sap who bought new and now will take any reasonable offer, sounds like an interesting idea to me. I’ve never done it.)
But does borrowing the money to buy a timeshare make it worse? I don’t see how. Indeed, once you set aside the foolishness of buying the thing, a loan to do it seems quite reasonable. The developer may provide financing on special terms and I think that under some circumstances the interest is tax deductible.
2. Payday Loans. This is the first of the bad forms of borrowing instead of bad reasons. And it is very bad, by which I mean very expensive. Compared to a payday loan, credit cards are free. Tony Soprano gave better terms. Seriously. Take out a payday loan only as an absolutely positively last resort.
3. Plastic Surgery. I do not have any first hand knowledge of this, but I am led to believe that it is a purchase that many people are quite happy with afterwards. (And like all men, I don’t care when they’re fake.) So why not borrow money for it?
I can understand the (mostly psychological) argument against borrowing money for instant and brief gratification. Paying for something years after you have stopped enjoying it could be a bummer. But this is, presumably, a long term enjoyment thing. And wouldn’t you get more out of it now when you are younger, rather than later when you have saved up enough for it?
As I understand it, plastic surgery is routinely financed. Some big banks have groups dedicated to it. I would think that repossessing/foreclosing on deadbeats would be a problem, but I guess they’ve worked that out somehow.
4. Gambling. This turns out to be about a bad form of debt, to wit, casino credit. Again, I have no personal experience here. I do occasionally visit casinos, and find them amusing for an hour or two at a time, but I always bet the lowest stakes available. So what I need for chips is usually on me already. (For the benefit of the kids: old guys like me usually carry five or ten pieces of paper with Andrew Jackson’s picture on them inside what we call a “wallet.”)
Apparently, and I had to look this up in Wikipedia, casinos will loan you money to gamble with if you ask nicely and play for stakes large enough to justify the paperwork. The interest rate is zero. You have to pay it back in 30 or 45 days, but still. Zero. Am I missing something? If you are the kind of guy who plays with $5K in chips, why would you ever pay for them in cash?
5. 401k Loan. The third bad form of debt rather than bad purpose. And on this one the author of the WalletPop post is just lost.
Borrowing money from a 401(k) retirement plan before age 59 1/2 will lead to some heavy fees that the federal government levies as a way to discourage people from using the money for anything except retirement.
Unless they changed the rules recently when I wasn’t paying attention, this just ain’t so. Borrowing from your 401k is not a taxable event and the government charges no fees. Not only are the terms likely to be attractive, but you pay the interest to yourself, i.e. interest paid goes into your account rather than to a bank.
Of course, it still is debt and doing something really dumb with the money is still a bad idea, but as debt goes this is the best deal you are likely to see.
6. Wedding. This is probably the clearest example of something you could be making payments on long after the fun is over. Your marriage will, we hope, continue to be a source of joy, but you could have gotten hitched at city hall instead. What we are talking about here is going into hock for one big bad-ass party.
It is not for me to say that dropping serious change on a party is always a bad use of money. Maybe, for you, it is the happiness maximizing move. But I get the idea that people tend to regret spending so much on weddings after the fact, particularly their own rather than their children’s.
(I think that in general wedding costs make more sense for comparatively well-heeled parents than for the principals. We never would have spent what my in-laws did for our wedding, but will probably spend something like it on my daughter’s. Many many years from now.)
7. Helping a Friend. What are friends for? Not much. Facebook, maybe? Whatever you do, don’t “loan” them money. Particularly, apparently, if you have to borrow it for the purpose. WalletPop further explains:
especially if the money is loaned to a boyfriend or girlfriend. Without a written contract, you’re screwed.
But the thing is, with boyfriends and girlfriends, that is often your exact goal.
8. Christmas. Okay, short joy, long payback. I get it. But it’s Christmas. The holiest day of the American year, when even supermarkets close for a few hours. Hitting the mall in December is not merely indulgent, it is expressing your identity as an American. Remember: if you don’t max out your cards, you let the terrorists win.
Seriously though, spending too much on Christmas gifts has always seemed particularly pointless to me. Nobody over 16 really cares what they get, as long as you thought of them enough to get any object that could be wrapped in paper and a ribbon. (Mothers may be a possible exception, but most people only have one of those.) Your 8-year-old may be upset he didn’t get the $400 Star Wars Lego set, but 8 is a great age to learn about realistic expectations. Even on Christmas.
9. Buy a New Car. Funny you should bring this up. I have long advocated buying cars used. But SmartMoney just came out with a piece alleging that the old saw about new cars losing a huge portion of their value the moment they leave the lot isn’t true any more. Apparently, enough of us have figured out how dumb the immediate drop in value was that it has been priced out of the market.
I have no idea if this is true or not, and I am the last person on Earth who would take SmartMoney’s word for it. But it is at least a plausible story.
Furthermore, SmartMoney makes the argument that a new car might in some cases be a better idea than used because of the great deals you can get financing it. In other words, not only is buying a new car a good idea, it may be a better idea if you have to borrow the money to do it.
10. Stock Market. This is really a different animal than the other things you could buy with borrowed money. Here we are talking about financing an investment, where the calculus is pretty straightforward. Will the investment pay more than the debt costs? More to the point, this form of borrowing has an undo button that the plastic surgery and weddings don’t. You can think better of the investment, sell it, and repay the loan.
Borrowing to finance your stock market investments is more commonly called using leverage. It is dangerous in that it magnifies the volatility of the already risky investments you are making. That said, the terms of the loans are good, roughly on par with what you might get on a home mortgage and, like a home mortgage, interest is tax deductible. Also, possibly uniquely among types of loans, the more you borrow the better the rates get.