To Borrow or not to Borrow?

I met a friend at a recent seminar event. I found out that he was recently laid off & had a tidy sum of money which he actually used to pay off his home loan. He remarked that "Do you know how much interest they(Banks) are charging"....they'll kill you. Without knowing the specifics, I remarked that actually taking on some debts is not too bad & especially with today's low interest rates & high inflation rate situation. I proceeded to explain further with an example. Lets say you borrow $100,000 from the bank @ 3% annual interest with a duration of 1 year. At the end of the year, you will need to pay off the principal amount which is $100,000 plus $3000 of interest or $103,000 in total. Lets assume that for the year, inflation is at a high of 6% which is true today. With inflation, $1 today is worth more than $1 in the future. $100,000 borrow today is actually worth only $94,000 1 year later at 6% inflation. Even with paying off the $3000 of interest at the end of the year, the future value is only $97,000. So technically, its like you borrow $100,000 today but pay off only $97,000 1 year later. You still stand to make a profit $3000 by being a borrower. This happens because the inflation rate is higher than the interest rate (6% Vs 3%). In fact, for this example, the inflation adjusted interest rate is -2.83% [(1.03/1.06)-1]%. Coming back to my friend, an alternative option for him is to instead of paying of his loan, but perhaps invest the money for higher returns(there are risk of course). He should perhaps stay with the loan & better yet, re-finance it if he hasn't done it for a while since the bank is technically paying him interest for borrowing. There are many investments vehicles to look at such as unit trust, bonds, equities, etc depending on one's risk profile. The worst thing to do of course is to leave his money in the savings account, do nothing & not even paying off his home loan. In that latter case, he is technically paying the bank interest for leaving funds in their care. Please note that I am generalising here. A person's current life cycle, financial objectives, cash flow situation, net worth situation, & financial ratios need to be looked at in totality before we can say whats the best course of action. Its therefore best to seek professional advise regarding one's financial affairs. Example speak with a Certified Financial Planner (CFPTM) for comprehensive financial advise.