I've been taking all the cheap fixed-rate debt banks would like to give me lately.
In practice I find the only way I get a low-enough rate on a longish-term fixed-rate loan is to use collateral. That is, auto loans and home loans. I haven't seen any personal loans with a low enough fixed rate. (Student loans may be cheap enough if they're subsidized, I guess.)
Here's how I think of the rate:
If you look at https://personal.vanguard.com/us/insights/saving-investing/model-portfolio-allocations , the average annual return on 80% bonds / 20% stocks is 6.7%, with worst year -10.3%. That's a nominal return not a real return. If you subtract taxes, say your marginal rate (the rate you pay on your last dollar of income) is 28% federal plus 5% state, then if you have no tax deferral the 6.7% becomes about a 4.5% average, with reasonably wide variation year-by-year.
(You can mess with this, e.g. using tax-exempt bonds and tax-efficient stock funds, etc. which would be wise, but for deciding whether to take out debt, getting too detailed is false precision. The 6.7% number is only an average to begin with, not a guarantee.)
Say you pay 4.5% on a loan, and you keep your money in very conservative investments, that's probably at least going to break even if you give it some years. It certainly can and sometimes will fail to break even over some time periods, but the risk of outright catastrophe is low. If your annual loss is 10%, that sucks, but it should not ruin your life.
In practice, I got a home loan for close to 4.5% which is tax-deductible so a lower effective rate, and got an auto loan subsidized by the manufacturer for under 3%. Both are long-term fixed-rate loans with collateral. So I was happy to borrow this money paying about a 3% effective rate in both cases, well below my rough threshold of 4.5%.
I do not, however, run a credit card balance; even though one of my cards is only 7% right now, 7% is too high, and it's a floating rate that could rise. The personal loans I've seen have too-high rates also.
- One of the reasons I take the loans is liquidity. If I have $N in cash and then owe relatively small payments over 6 years, then that is a lot more flexible than not having cash and owning a car. If not having cash and owning the car outright ever becomes desirable, then pay off the loan, and be in that situation overnight. The other direction is often impossible.
- Another reason I take the loans is that it makes budgeting easier. I like to think of major assets (house, car, etc.) in terms of monthly cost. Then you can see how much more you need per year (and how much more you have to save for retirement) if you spend a certain amount on the car. Of course if you pay cash you can still compute the monthly cost, but it's just a little easier if it's actually a monthly cost, in my opinion.
- If you need a credit history, getting a loan can give you one, though a credit card is probably a simpler way.
- I have a fair amount of "wiggle room" (solid emergency fund, no trouble covering the debt payments). The more trouble you'll have with the payments, the less you should be buying anything at all probably, let alone with debt.
- You probably shouldn't be considering your emergency fund in this calculation. That is, don't consider using the emergency fund instead of getting the loan, and don't consider putting the emergency fund in anything higher yield than cash.
- Borrowing money at a low rate puts you in a good place if interest rates rise (or, probably saying the same thing, if inflation increases).
- Borrowing money (even at a low rate) would be bad if we get deflation. Thankfully that hasn't happened in general since the Depression, but it is happening now in housing specifically, and I'm sure you've seen on the news how it's bad for those who borrowed money to buy.
- Borrowing money at a floating rate is a risky idea. You lose in both inflation and deflation scenarios.
- I'm not sure the pay-cash-or-get-the-loan decision is all that important in the scheme of things. It isn't likely to be make-or-break on your overall financial situation. So you may as well do what makes you feel comfortable. For me, extra flexibility makes me comfortable, but for others, debt makes them uncomfortable. Both are valid.
- My discussion here assumes you have the option to pay cash. If you couldn't pay cash, you have nothing to invest, and no cash to keep in order to increase flexibility.
Overall I think using debt as a tool requires that you're already financially stable, such that the debt isn't creating a risky situation. The debt should be used to increase liquidity and flexibility and perhaps boost investment returns a bit.
Where you're likely to get into trouble is using debt to increase your purchasing power, especially if you use debt to buy things that aren't necessary.
For me the primary reason to use debt is flexibility and liquidity, and the secondary "bonus" reason is a possible spread between the debt rate and investment returns.