Feeling a bit overstretched financially? If you are, you’re not alone. American consumers have been racking up debt in record numbers. With lenders promising low-low interest rates, it’s no wonder we’ve become so credit happy.

While there’s nothing wrong with borrowing money, it’s important to consider the impact of borrowing on your longer term financial goals. Sometimes the need to borrow cannot be avoided. This may occur when you need to come up with the funds to finance a serious illness.

Yes - If you have an option, though, it is best to reserve borrowing for the acquisition of appreciating assets or assets that will pay a return on your investment. These may include assets such as:

Your principal residence - the tax-deductible interest expense on home mortgages can significantly reduce your nominal borrowing cost. In addition, with consumer prices rising with inflation, your purchasing power is greater if you buy a home with today’s dollars and pay for it with tomorrow’s dollars.

Keep in mind that lenders may paint a pretty picture when it comes to how much home you qualify for. The newspapers today are full of stories about lenders approving loans in excess of the borrower’s ability to pay. The temptation to purchase as much house as possible can leave you overextended.

A growing business - taking out a loan to invest in the growth and profitability of your business increases your ability to build wealth. To help minimize your outstanding loan amount at any given time, consider devising a phased growth plan. For example, you might invest in additional facility space to increase production capacity. Once you’ve paid off that loan, you might finance new machinery and equipment to automate processes and reduce operational costs.

Education expenses - taking out a loan to pay for education expenses or to otherwise improve your job skills can be a good move because the ultimate goal is to increase your earning power. Uncle Sam may be your partner in these borrowings if you qualify under one of the code sections that allows for deductions or credits for education expenses and financing.

No - On the other hand, you should avoid borrowing money, or at least minimize loan amounts, to subsidize lifestyle or for purchasing “wasting assets.” These include items with a limited useful life that depreciate in value over time. A classic example of a wasting asset is a car, which depreciates as you drive it off the lot.

Many retailers offer no-interest loans on wasting assets (for example, furniture, computers, and automobiles). Sometimes, it makes sense to take advantage of those loans because they represent real incentives to make the sale. Just be sure you understand the true cost of the asset itself before entering into such a contract – otherwise you may be paying too much for it.

Borrowing Traps

When finances are stretched thin, you may be tempted to fall into these borrowing traps:

1. Borrowing against your home. Be cautious when taking a loan against your home or taking out a home equity line of credit to pay off debts or buy assets. Though it might save you some taxes, if not done properly it may cause you to lose liquidity and perhaps net worth. If things get bad and you default on the loan, you may lose your home.

2. Borrowing from your 401 (k) plan. When you repay a loan to your 401(k), you’re essentially paying the interest back to yourself. This may sound advantageous. But keep in mind that you’ll lose any tax-deferred growth you would have earned had you left the money in the plan. If you’re unable to pay back the loan within the required time, it may be classified as a premature distribution will be subject to penalty and income tax.

3. Borrowing via credit cards. I will go out on a very short limb and say that this is never a good idea. You may be enticed by the early low rates and the ease of obtaining the funds. You will regret it. You are the amateur without money and the credit card companies are the professionals with it. You tell me who to bet on.

A Word on Family Business and Loans

As your business and financial success becomes apparent to others, your relatives may view you as a source for financial aid. But lending money outright to a family member or co-signing on a home or car loan for them can be risky for you — from both an emotional and financial standpoint.

To protect yourself, specify the terms of your loan arrangement in writing just as a professional lender would. If the loan amount is substantial, make sure you’re informed of any legal and tax implications in case one of you should die before the loan is settled. You may want to ask for collateral to secure the loan or take out a life insurance policy to cover the balance.

If you’ve cosigned on a loan or guaranteed it and your relative defaults on the payments, you are responsible for making the remaining payments. Before saying “yes” to a family member’s request for a loan, prepare yourself for the possibility of never seeing your money. If you can accept that, you may want to go ahead. If not, best to take a pass.