Someone (can’t remember who) in a thread of at least a year ago said that you should buy on credit only things that appreciate in value. So the house and the education qualify, but probably not the car.
But this is America after all. You might be fresh out of college and just landed a new job 20 miles away that is close to no public transportation. You have absolutely no cash so you can either turn down the job or buy a car on credit and hope the job works out. Many of us have been in that situation so I can see how buying a car on credit might be in the same class as putting food or rent on credit in some situations. That doesn’t mean you need a very expensive car or or new car at all but they are a necessity for the majority of adults in this country. I by used cars with cash these days myself however so the general idea can work either way.
You might also find a cow-orker who’d provide transport for a fee. But I admit this would be a good candidate for some debt. It need not be vast, or last all that long - if the job is a decent one, a reasonably frugal person will have enough to buy a cheap car in as little as a few months.
Yet we all know that there are huge numbers of folks who think that the only requirement for driving a nice car is the ability to imagine they can somehow make the payments. Since lots of their friends are doing the same thing, it seems to make sense. As one woman at my first place of work said, “I’m as good as anyone else - I don’t see why I shouldn’t drive as nice a car.” (And it wasn’t just her car - she was in debt up to her eyeballs and obviously regarded this as the natural state of things.)
I hadn’t thought of Pundit’s proviso concerning a family member’s imminent death. Prior to that I couldn’t think of any reason I would finance a vacation. When my buddy died of cancer a few years back, he forwent a couple of vacations - to Egypt, the Black Sea, and Tibet - that he had long desired in order to undergo (unsuccessful) treatment. Before he died he told me that he regretted not going on those trips, even if it had meant that he would have died a few weeks/months earlier. I don’t think he would have had to go into serious debt to pay for those trips, but that provides me a context for Pundit’s suggestion.
I think it is a deficiency of most present-day Americans that they have no concept of actually saving for things they want. Of course, I’m a cheap-ass Polack who owns his house and cars free and clear and has never carried a credit card balance.
This is an interesting way to look at it. Lets say you owe $50K on your house and come into in whatever way that money. Is it completely stupid to use the money for something besides paying off the loan? I don’t think most people would criticize you too harshly for that, but the principle is pretty much the same, isn’t it? You’re still paying interest when you don’t have to.
I, personally, would never take out a loan to pay for a trip (nor would I put one on a credit card, unless I had the cash available to pay it off immediately).
I side with the OP. I think Dangerosa summed it up pretty well:
Would it be a “dream vacation” if I had to spend it worrying about all the extra work or belt-tightening I’d have to do when I got home to pay it off?
My father in law, whom I’ve never met because he died 20 years ago, suffered a heart attack back when my husband was a - well - not a teenager, let’s just say a lot younger than he is now - and when the Dr.'s gave Dad six months to live, he and my mother in law (who is alive - and I love her very much!) spent that six months travelling and making up for every vacation they never took because of lack of funds by taking out money on their house. She still says it was the best money they ever spent. He died about a year after.
Would I do it? Hell no - I’m too paranoid to even consider buying a house in the first place. And broke. That whole broke thing is really working against me, real estate wise.
Wow, we must be really unusual.
I always wanted to go to Hong Kong, talked about it all the time. The year before it went back to China my husband basically said “Let’s borrow the money from my retirement account and go.” We took our two kids (13 and 15) and spent a month in Hong Kong, Singapore and Indonesia. My “dream vacation” and something we all still talk about. Paid back the retirement account loan and never looked back.
Right about the time I got my PhD we took out a home-improvement loan to put a new roof on the house. Then we realized we were moving out of state in the very near future and used the money to take the kiddies to Disney World instead. OUR parents were horrified!! Didn’t effect the price we got for the house at all.
But then we’re vacation type of people, kind of unusual in the US I think. We drive our cars to death, have the same furniture we bought when we married 30 years ago, bought the kiddies clothes at resale stores even in high school, but always went on great vacations.
Kids are grown now, but when we all get together, the talk is still all about the great places we’ve been and the great places we plan to go.
Now we could make way more money than we do, but choose to go on vacation for 2-3 months a year. The only money we owe is the mortgage on our house, which we could have paid off if we didn’t travel as much as we do. I can’t imagine saying “Damn, I sure wish I’ld paid off that mortgage instead of traveling,” while on my death bed.
Not that I’m suggesting going deeply into debt if you have no hope of repaying that debt. Just that sometimes debt isn’t as bad as some seem to be implying here.
Sinjin–good post. I spent two months in Europe after I graduated high school. It was an experience that really changed me and the best time of my life (and I’ve had a great life). I saved for a couple of years to go, but if I hadn’t and was still in debt over it seven years later I wouldn’t regret it for a minute.
For special circumstances I would take a loan for a vacation - things like weddings, funerals or family reunions.
Also for “once in a lifetime” holidays for which timing is important but I don’t have cash.
What I am currently planning to do is to take a loan on our (second) property to put into equities. Not neccessarily sound planning I know, but I want to make the most of the equity we have - here’s my reasoning
- We currently have a LOT of equity, and even a loan of $50-100k won’t increase the amount of our mortage payments, merely the term. And even with a $100 k increase we will only be using around 50% of our equity
- Mortgage payments are currently 100% covered by the rental
- $50-$100K in equities (if chosen properly) will both appreciate in value and generate income.
- Here’s the most important - we place ALL our spare money into debt reduction - to SAVE $50-100k would take 5 years plus - during which time I will have forgone all the potential earnings from the equity.
- I know I have poor impulse control, so for me mortgage payments are better than deposits into a savings account
Travel IS education.
Yes, I have and would take out loans to travel. Not to go to Vegas, stay in swank hotels, and gamble, but to really travel - go to places I’ve never gone before and see what it’s like there.
Denying yourself the chance to see different cultures and areas because of some silly moral high ground over not taking out loans to do it is really limiting yourself IMO. Of course, if you truly can’t afford it, that’s one thing. There’s nothing wrong with taking a few months (or longer) to pay off a good vacation as long as it doesn’t put you in the poorhouse.
It’s not a moral high ground, it’s the fiscal high ground. I only have x amount of disposable dollars. I’d much rather spend my hard-earned money DOING something than giving it to the bank in the form of interest. There’s no VALUE by paying interest.
If you can afford to pay off the loan over six months, you can afford to take the trip six months later and not have a loan. Can you spare the cultural education by skipping a single trip and getting yourself ahead in savings so you can pay cash? That leaves you with the best of both worlds.
Borrowing against your home is particularly frightening. The interest rate is low, but it has become easy for many Americans to use their home as an ATM. When they second mortgage to the limit, and the market crashes, they will now hold a note for more than the home is worth. If they then find themselves in a situation where they can’t afford the home or need to move, they are now upside down. I’ve also seen people who are nearing retirement age with huge mortgages left and no savings. They can’t afford to retire, and wonder how “everyone” else can. Its really easy to do, and I’ve watched smart people do it.
Borrowing against your 401k is also frightening, because now you’ll pay taxes on that money twice. With a normal 401k contribution, you skip paying taxes, but you’ll pay them when you take money out. Take out a loan and you pay it back with after tax dollars, and will pay taxes on those dollars a second time when you take it out. Double taxation is an evil bite.
I hear that!
The sad thing is people go into major debt for vacations and weddings all the time! My co-worker spent $10k on the hall alone, and didn’t make it to her first anniversary. There’s no way I want to pay for five years for a party honoring someone whose guts I hate!
Why? I’m responsible with loans. There’s no reason at all to not go on vacation now as opposed to in six months.
If someone isn’t responsible with their money and gets themselves in trouble, that’s one thing. But there’s nothing morally or fiscally wrong with deciding to take out a loan if you want to and can afford it.
Because your vacation will be cheaper for one thing, and then you could afford more of them.
A second factor, if you have financial obligations going out, unless you have a guareteed source of income, you may find yourself in a bind. What if you came back from vacation to no job? Granted, some people are lucky enough not to have to face those issues, but it sucks to have debt that was reasonable when you took it on, and becomes unaffordable with a change in circumstances.
The older I get, the less I want to get into a “what if” situation. My husband is eligible for retirement in about 9 months. We don’t want to take on a new note for a car, let alone a freekin’ vacation. It’s all I can do to save enough to keep us above water in our golden years. A loan for a vacation? No way.
I laughed at those commercials too; a loan for vacation?? Isn’t that something you’re supposed to do when things are going well and you have a little extra money you have saved? Or you have saved for many years, thus making it a dream come true?
Maybe it’s a keeping-up-with-the-Joneses thing? Reminds me of the commercial with the guy smiling about all the things he has…“I’m in debt up to my eyeballs”.
I saw a heartbreaking episode of “Big Spender”, the show where a compulsive spending person or couple is confronted about their issue. This woman goes shopping every day and has debt of $96,000 on credit cards (a 48-page credit report). Bad enough if it were just her, but she has a partner and twin kids to take care of, and the partner is committed to sticking with her and the debt becoming hers too. They don’t make enough to cover minimum payments, and so the counselor gives them a budget to cut back to. So say they end up paying twice the current balance: that’s about 30 years of paying back just what she has already spent, with scrimping and saving the whole time. THEY CAN NEVER HAVE ANYTHING EXTRA FOR 30 YEARS!! :eek: It’s was horrible.
I personally would use an eqiuity loan to take a vacation. For one the interest rate is too high. But it is better than pulling out a credit card. When I have my current pension loan paid off (used the money to move into the new house) I’ll probably borrow from the pension to go on vacations. The interest rate is very low and it is automatically deducted from my paycheck.