Jason B. Miyashita
Senior vice president, investments
Senior institutional consultant
Asia Pacific Group of Raymond James
Nearly everyone at some stage of his or her life will need to borrow money, whether it is for an emergency or a major purchase. And that’s not such a bad thing because while you may not realize it, using debt can help you achieve certain financial goals sooner than by spending months or years saving up cash. Moreover, borrowing and paying off a loan — and consistently paying on time — is a sound way to establish an excellent credit rating.
Nevertheless, when borrowing, it’s important to analyze the options you have and choose wisely. While smaller borrowing needs can be easily covered by a credit card, other needs, like a new home or automobile, may require a sizable loan. And you do have options. In addition to a traditional fixed-interest loan from your bank, a margin account* or a securities-based line of credit* can provide alternative access to money.
Borrow according to your needs
Credit cards provide convenient and quick access to funds for smaller purchases. The terms associated with credit cards, however, can often be less favorable compared to other borrowing methods, particularly when it comes to interest rates and annual membership fees. That said, many credit cards offer reward programs, and if you want to use the card for everyday spending, it’s a great way to collect cash rewards or points for future purchases. Always remember, however, that a credit card is just like borrowing from your neighborhood bank, and how you treat it will impact your credit rating. When possible, pay off the outstanding balance each month or carry only a small balance to keep your interest expense to a minimum and your credit rating solid.
A solid credit rating is crucial for securing all kinds of future borrowing, including an affordable bank loan for larger purchases, like an automobile or a home. In fact, your credit rating — and how well you handle debt — plays a part in determining how much you can borrow and how much of a down payment you will need to provide.
Affluent borrowers can also consider alternative borrowing solutions, such as margin loans and securities-based lines of credit, both of which use securities — stocks, bonds and mutual funds — in an investment account as collateral. These methods tend to be available at attractive, more competitive interest rates. Margin loans and securities-based lines of credit also can offer flexible repayment terms for the borrower.
Good debt or bad?
Conventional wisdom may make you think that no debt is best for your personal finances. That’s just not the case. There is good debt. There is also bad debt. The key is to understand and respect the difference.
Good debt, like mortgages, school loans and business loans, enhances your financial position, builds wealth and — most importantly — improves your credit rating. Bad debt is often associated with buying things you simply don’t need or can’t afford and using your credit card to do it. To maintain your good debt, the best plan is to eliminate credit card debt and pay off the balance each month. As a rule of thumb, try to keep your monthly recurring debt to less than one-third of your monthly income.
There are clearly many choices to make when borrowing. The key is to consider each facet of debt strategically. No matter what the need, work with your financial institution and adviser in determining the best loan alternative for your situation.
*Borrowing on margin and a securities-based line of credit may involve a high degree of risk and may not be suitable for all clients. Market conditions can magnify any potential for loss. If the market turns against the client, he or she may be required to deposit additional securities and/or cash in the account(s) or pay down the loan. The securities in the pledged account(s) may be sold to meet the collateral call, and the firm can sell the client’s securities without contacting them. The interest rates charged are determined by the market value of pledged assets and Capital Access.