It Is Usually a Good Idea to Borrow for These Key Expenses

Taking on debt is often viewed negatively, but borrowing can be a smart financial move in certain situations. When used strategically, loans can provide access to opportunities or resources that may otherwise be out of reach, potentially leading to long-term benefits. The key is distinguishing between good debt—investments that improve your financial position—and bad debt, which carries high costs without meaningful returns.

Some expenses justify borrowing because they can increase income, reduce costs, or address urgent needs. Understanding when it makes sense to take on debt helps in making informed financial decisions while avoiding unnecessary strain.

Funding Education or Professional Development

Investing in education or professional development can lead to higher earning potential and better career opportunities. A bachelor’s degree holder, on average, earns significantly more than someone with only a high school diploma, according to data from the U.S. Bureau of Labor Statistics. Over a lifetime, this income gap can amount to hundreds of thousands of dollars, making student loans a reasonable investment when managed properly.

Federal student loans typically offer lower interest rates and more flexible repayment options than private loans. Programs like income-driven repayment plans and Public Service Loan Forgiveness (PSLF) can help reduce the financial burden, especially for those entering lower-paying but socially valuable careers. Some employers also offer tuition reimbursement programs, which can offset costs without requiring personal debt. For those considering private loans, comparing interest rates, repayment terms, and borrower protections is essential to avoid excessive financial strain.

Beyond traditional degrees, borrowing for professional certifications or specialized training can also be worthwhile. Fields like information technology, healthcare, and finance often require ongoing education to stay competitive. Certifications such as the Certified Public Accountant (CPA), Project Management Professional (PMP), or various IT credentials can lead to salary increases and job security. In some cases, professionals see higher wages or promotions shortly after completing their training, making the cost of borrowing a justifiable expense.

Consolidating Existing Debts

Managing multiple debts with varying interest rates and due dates can be overwhelming, often leading to missed payments or higher costs. Debt consolidation simplifies repayment by combining multiple obligations into a single loan, ideally with a lower interest rate or more manageable terms. This approach is particularly beneficial for those carrying high-interest debt, such as credit card balances or payday loans.

One common method is a balance transfer credit card, which allows borrowers to move high-interest balances onto a new card with a temporary 0% APR period. This can provide short-term relief, but it is only effective if the balance is paid off before the promotional period ends, as interest rates can jump significantly afterward. Another option is a debt consolidation loan, which provides a fixed repayment schedule and a potentially lower interest rate than revolving credit accounts. Lenders assess creditworthiness, income, and outstanding debt levels before approving such loans, so individuals with strong credit profiles typically receive the most favorable terms.

For homeowners, a home equity loan or home equity line of credit (HELOC) can be used to consolidate high-interest debt by leveraging property as collateral. These options often come with lower interest rates than unsecured loans, but they carry the risk of foreclosure if payments are not made. Similarly, borrowers with federal student loans may consider a Direct Consolidation Loan, which combines multiple loans into one, potentially reducing monthly payments by extending the repayment term. However, this may increase the total interest paid over time.

Acquiring Income-Producing Assets

Using borrowed funds to purchase assets that generate revenue can be a strategic way to build wealth. Rental properties, dividend-paying stocks, and small business ventures are common examples where debt can be leveraged to create steady cash flow. The key is ensuring the income generated exceeds the cost of borrowing, allowing for a positive return on investment.

Real estate is one of the most widely used avenues for this strategy. Investors often take out mortgages to acquire rental properties, using tenant payments to cover loan obligations while building equity. Lenders typically require a down payment of at least 15-25% for investment properties, and interest rates are generally higher than those for primary residences. A well-chosen property in a strong rental market can provide consistent income and potential appreciation, but factors such as property taxes, maintenance costs, and vacancy risks must be carefully evaluated.

Beyond real estate, margin loans allow investors to borrow against their existing stock holdings to purchase additional securities. This amplifies potential gains but also increases exposure to market downturns, as losses can exceed the initial investment if prices decline sharply. Brokerage firms impose margin requirements, typically mandating that investors maintain equity levels above a certain threshold to avoid forced liquidations. Maintaining a diversified portfolio helps mitigate the potential downsides of this approach.

Business acquisitions can also justify taking on debt, particularly when buying an established enterprise with a proven revenue stream. Small Business Administration (SBA) loans provide favorable terms for qualified borrowers looking to finance a purchase or expand operations. Evaluating financial statements, cash flow projections, and industry trends is essential before committing to such an investment, as miscalculations can lead to significant financial strain.

Covering Medical or Other Critical Expenses

Unexpected medical expenses can strain finances, especially when insurance coverage is insufficient. Emergency procedures, long-term treatments, and specialized care often come with significant costs, forcing individuals to consider borrowing as a means of covering immediate needs. Healthcare financing options, such as medical credit cards or personal loans, provide short-term relief but must be carefully assessed to avoid excessive interest charges. Some hospitals and providers offer payment plans with little to no interest, making direct negotiation a preferable alternative before resorting to high-cost borrowing.

For those facing ongoing medical treatments, such as chemotherapy or chronic illness management, home equity loans or lines of credit may provide lower-cost financing compared to unsecured borrowing. These options allow homeowners to access capital at lower interest rates, but the risk of losing property in case of default must be weighed carefully. Health savings accounts (HSAs) and flexible spending accounts (FSAs) can also help mitigate costs, though they require advance planning and contributions before expenses arise.

Expanding or Launching a Business

Entrepreneurs often require external funding to start or grow a business, as personal savings may not be sufficient to cover operational costs, inventory, or expansion efforts. Borrowing can be a practical solution when the expected return on investment justifies the cost of financing. Access to capital allows businesses to scale operations, enter new markets, or invest in technology that enhances efficiency and competitiveness. The challenge lies in selecting the right type of financing and ensuring that debt obligations align with projected cash flows.

Small Business Administration (SBA) loans are a popular choice for startups and expanding enterprises due to their relatively low interest rates and extended repayment terms. These government-backed loans reduce lender risk, making it easier for businesses with limited credit history to secure funding. Traditional bank loans, while offering competitive rates, often require substantial collateral and a strong financial track record. Alternative financing options, such as revenue-based loans or merchant cash advances, provide quicker access to funds but come with higher costs that can strain profitability.

Venture debt is another option for businesses with strong growth potential but limited tangible assets. Unlike equity financing, which dilutes ownership, venture debt allows companies to raise capital without giving up control. This type of financing is commonly used by startups that have already secured venture capital funding and need additional liquidity to reach the next stage of growth. Regardless of the funding source, careful financial planning and a clear repayment strategy are essential to avoid excessive leverage that could jeopardize long-term stability.