When Is It Pretty Much Always a Terrible Idea to Borrow Money?

NEW YORK (MainStreet) — The average American household with debt has over $15,000 in credit card debt as of June 2015. The total shared debt of all Americans is over $11 trillion, up 1.7% from last year. With so much debt, it's important to be cautious about adding new debt to your share of the load. And there are definitely some times when it's just never a good idea to take on more debt. So when you should you absolutely, positively, never borrow money?

When You Can't Pay It Back

Don't borrow money you can't pay back. Sounds obvious, right? But Mike Sullivan, director of education with Take Charge America, points out that it's not as obvious as you might think. "If you're already cash poor and can't make your payments, borrowing more money could be a disaster," he says. He advises people not to borrow money unless they can put together a budget that shows how they're going to pay it back. "If you can't do that, you're walking into a financial disaster," he says.

To Maintain a Lifestyle

"Borrowing to maintain a lifestyle is the most inappropriate reason of all," says Sullivan. He says that lots of people come in who have borrowed a lot of money. When he asks why, they often answer that it was the only way they could get by. That's the very definition of borrowing money to maintain a lifestyle. More than just credit card debt, Sullivan suggests that this is a great way to get caught in the cycle of payday loans and other high interest loan products. You really can't afford the lifestyle you're living and you're using credit and other forms of debt to inflate your income artificially.

To Indulge Yourself or Others

According to Sullivan, another common reason people go deeply into debt is because they're indulging themselves -- or others. "If you just 'have to have something' that you don't have the money for, that's borrowing for the wrong reasons," Sullivan says. Oftentimes, people will borrow money against future earnings, because they feel that they deserve to treat themselves. However, this is a costly mistake that often puts the borrower into a cycle of debt he can't repay. Then they end up committing the mistake in the previous section -- borrowing money to maintain a lifestyle. Indeed, it's hard to see where the last point ends and this one begins.

When the Terms Are Unfavorable

John Heath, managing attorney with LexingtonLaw, believes that no one needs money so bad that he should agree to unfavorable terms. "You should never borrow money if you're in the position of being held over a barrel," he says. Outrageous interest is only one example of unfavorable terms. Heath also suggests that potential borrowers look at what happens in the event of default. "Does the interest rate go from high to outrageous?" he asks. He says it's important to always look at the fine print, and, if you don't understand it, find someone who can explain it to you. "A lot of times contracts are very one sided and put you at a severe disadvantage," he says.

When You're Emotionally Vulnerable

Heath says that when you're emotionally vulnerable, you don't make good decisions -- and that this applies doubly to money. "When people are under extreme amounts of stress or just coming out of an emotional trauma, it's generally a bad idea to borrow money," Heath says. But, it's not uncommon for people to borrow money right after a divorce or a death in the family. While you might need the money, there might be better ways of getting it than borrowing from a commercial lender. And the longer you can put off borrowing until you're in a better frame of mind, the better off your finances are going to be in the long run.

If You're Worried About Bankruptcy

Sullivan notes that "courts and judges are very unhappy if you borrow a lot of money, then file for bankruptcy." If you have even the slightest worry that you might be filing in the near future, "you should be very careful about borrowing money," Sullivan says. In a best case, the judge will refuse to discharge the newer debt. In a worst-case scenario, you might be suspected of bankruptcy fraud, which is a serious crime.

The bottom-line is that when it comes to borrowing money, there are more times when it's probably not a good idea than times when it is a good idea. Be cautious and only borrow money when you absolutely have to, or when you're purchasing a house. And when you do borrow money, make sure that you're getting favorable terms. Otherwise, you're just making a bad situation even worse.

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