Based on the title of this post alone I guarantee there will be some hardcore zero debt personal finance fanatics who think I’m the dumbest person on the planet, but I’m here to take a radical position: paying interest isn’t always so bad.
Does paying interest suck? Absolutely. But sometimes you need to borrow and the only way to do it is to pay a little bit of interest.
Let me explain.
I’m Paying Interest for Cash Flow
I’m closing on my house in less than a month and I need to pay for my 20% down payment plus any other closing costs. That’s going to cost me tens of thousands of dollars.
I had to sell essentially all of my stocks, drain my Roth IRA, and even take a loan against my 401k to get the money for the down payment, but after doing all of that I now have enough money for closing.
I should also mention I bought my fiancee’s engagement ring with my credit card (which I usually pay off every month). That credit card bill is due in a few days and I can either pay it off completely like usual or pay a smaller amount and carry a balance.
If I pay it off completely it’s going to put me right around the amount that I need for closing on my house. I actually don’t even know exactly how much I’ll need at closing because all the paperwork and stuff isn’t done, so it might leave me a little short.
If I show up to closing and I don’t have enough money in my account then that’s going to be a very serious problem. I don’t even know what exactly would happen but I’m sure it would be bad.
On the other hand I can pay off some of it and leave a $2,000 balance on which I would pay interest for one, maybe two months.
The Cost to Carry a Balance
The APR on my credit card is 11.24%. If I carry a $2,000 balance on that card for one month I will pay just $18.73 in interest. If I carry that balance for two months it’s $37.46.
If I were to borrow $2,000 from a friend for a month I’d probably pay him back and then take him out to dinner as a “thank you”. The dinner would cost me more than $18.73.
Also keep in mind that I get rewards on my credit card. This particular card gets at least 2% back, which means I already got $40.00 in rewards when I spent that $2,000. Even if I pay interest on it for two months I still make money.
It doesn’t sound like such a bad idea anymore, huh?
There are No Absolutes in Personal Finance
Lots of people would tell you that debt is never acceptable. Those people would tell me to either pay off my entire credit card and risk not having enough money at closing, or they would tell me that I’m an idiot for buying a house without being 100% sure I could pay the closing costs without going into debt.
Those people would call me an idiot for spending $20 to borrow money to buy a freaking house!!!!
Those people are the idiots in my opinion.
Carrying a balance on your credit card every month is a great way to lost a lot of money and make your credit card issuer rich. Carrying a balance for just one or two months is a shrewd way of getting a very low interest short-term loan.
Readers: Have you ever borrowed money and paid interest because you needed the cash flow?