Everyone will incur some debts at some point in life…
Afterall, it’s how we pay for our big-ticket items like houses and cars and even small daily purchases like groceries.
Debt is simply an amount of money one person borrows from another.
While most people associate having debts as a bad thing, the truth is: Not all debts are bad.
While some debts may require you to get rid of them as soon as possible, some debts will actually do you more good…
This are what we term as “good debts”.
What Are Good Debts?
Good debts are debts that could generate you more income in the future.
There is a saying that goes “It takes money to make money.” This is especially true for good debts.
Examples of Good Debts
1) Study Loans
In today’s society, having a higher education background means higher income potential. However, not every person could afford the cost of a university degree.
What could they do to have access to the expensive tuition courses?
They could take out a student loan and then repay it later when they graduate and get a job.
With a university degree in hand, you could land high paying jobs that enable you to earn hundreds of thousands of dollars for the rest of your life, so a university student loan is well worth it.
2) Business Loans
The whole point of starting a new business is to generate income. However, how could you afford the initial cost of startup businesses?
You have to take a loan or borrow money from your friends if you don’t have cash available on your own. These are considered debts.
However, if you work hard and go in the right direction, your business will start generating revenues that would soon cover the initial costs.
With the business loan that you took up to start your business, it could well catapult into a huge fortune when your business takes off and become highly profitable.
3) Property Loan
Investing in property is one of the best ways to acquire wealth.
You could buy a house and live in it for a few decades before selling it a profit. Or you could invest in a piece of property and rent it out before selling it after a couple of years for capital gains…
However, few people will be able to pay for a new home or property in full cash. Hence, getting a property loan is considered a good debt as well.
You should however carefully consider how much you can afford to put down and what is the amount of loan you can take up. The higher the down payment you put up, the less you’ll owe and the less interest you incur over time.
Although you may be tempted to plough in all your savings to reduce your interest payments, it’s not actually advisable. You need to factor in other stuff, such as your need for cash reserves for emergency use and what your investments are earning.
Also, you wouldn’t want to throw in all your cash into a property if you have other debt.
This is because mortgages tend to have lower interest rates than other debt such as credit cards. So it might be more worthwhile to use the cash to finance your other debts first.
So What Are Bad Debts?
While good debts may still have risks associated with them, bad debts are debts that are downright bad.
Bad debts are debts that you take out to purchase things that will deteriorate in value when time passes.
Examples of Bad Debts
Some examples of bad debts include new cars, clothes, consumable goods and services, as well as credit cards.
Cars are especially in Singapore, there is no argument about it.New cars cost a lot to buy. While you may need a good vehicle to get you to work, or to run errands during the day, taking out a loan to afford a car is not recommended.
By the time you drive the new car home, your car has already depreciated in value and you will not be able to resell it at the price when you first bought it.
2) Credit Cards
Credit cards are considered to be the worst case of bad debts. The interest rates you have to pay is generally higher than those of normal consumer loans, and the payment schedules are set up to maximize a cardholder’s expenses.
Hence, you should strive to avoid keeping a balance on your credit card by all costs.
Always ensure you only buy things that you truly need and not just for the purpose for showing off.
The truth is, most people don’t have enough cash to purchase everything they want on their own. They sometimes need to take out a loan to afford things.
However, before you consider applying for a loan, you need to evaluate all if it’s a good debt or bad debt, so as to be able to make a wise choice.