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Krista Biernbaum

July 31 , 2017

Investment Basics: Borrowing Money - Know The Risks

Borrowing Money Risks

Many people don’t hesitate to borrow money when it’s time to make a major purchase, take a vacation, or improve their homes. Loans are often easy to obtain, and low interest rates can add to the allure. Be careful. Before you borrow money, be sure you’re comfortable with your ability to repay and you fully understand the risks.

Retirement Plan Loans

If you participate in a retirement plan at work, you may be able to borrow money from your account. The interest rate may be reasonable, and you may be able to repay the loan conveniently through payroll deduction. These are all positives. But also consider the negatives. If you borrow from your account, you’ll have to repay the loan (both principal and interest) with after-tax money. In a 35% tax bracket, for example, you’d need $15,385 of taxable income to repay $10,000. And most plans require participants who leave their employers to repay the loan in full. Amounts you don’t pay back would be considered distributed — increasing your taxable income that year.

Home Loans

When you meet all tax law requirements, you can deduct home mortgage and home equity interest (within limits) if you itemize your deductions. So far, so good. But also consider the risks. This type of debt is secured by your home. You shouldn’t take on more debt than you can comfortably handle. Then consider the possibility that you may want to — or have to — sell your home some day. You’d have to pay off the balance(s) of your loan(s) at that time. In a declining real estate market, it’s possible your sales proceeds might be less than your loan balance(s). And, before agreeing to a variable rate loan, consider the potential effect of rising interest rates on your payments.

Credit Cards

What could be easier than pulling out the plastic when you want to buy something? But, once again, know the risks. Overspending is never a good idea, especially when it means carrying a balance on your credit card for long periods. Even if the rate is highly competitive, consumer interest can really add up.

One of the benefits of working with Security National Bank is our ability to help you build wealth. Contact your Security National Bank Wealth Management advisor to learn more.

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