Even if you can get a loan, should you?

Is it the right thing to get a loan, even if you can afford it?

I can think of many people that would instantly answer “yes” to that question. Most of those people work at Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB).

I believe it’s important to maintain a good level of scepticism and cynicism about most things in life, particularly when someone is trying to sell you something. The best person to look out for your financial life is you, other people are happy to throw you under the metaphorical bus. Just look at all the issues uncovered in the royal commission.

Just because a bank says you can borrow a huge figure doesn’t mean you have to take it to the maximum level. If it weren’t for falling interest rates a lot more people might be in trouble with their mortgages right now.

I don’t think it’s necessary to get a loan for anything except property, business assets and (sadly) education.

Isn’t it better to save money, earn interest along the way and buy the item with cash?

A car, a fancy sofa or an expensive TV is so much more expensive if you use debt to buy it instead of paying with cash.

We only earn so much during our lifetimes, it would be a shame to pay more interest than we need to.

Foolish takeaway

There’s a reason why the big four ASX banks have been such huge profit generators. Lending is very profitable, meaning the borrowers are obviously net losers.

Just because your budget or bank says you could get a loan, doesn’t mean you should.

The best way to grow your wealth is not by taking on loans but by investing in quality shares for the long-term.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019

Source link Finance News Australia

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