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Good Debt VS Bad Debt
16 August 2021
2 mins read
2 mins read
Good debt
Bad debt
Taking on debt is generally viewed negatively as many people would assume that being debt-free is the way to go. But for most people, borrowing money and taking on debt is the only way to afford important big-ticket items like a home or higher education.
So, what exactly is debt? Well, to start off, debt is something, usually money, borrowed by one party from another and we pay it back in the future. But did you know that there is good debt and bad debt? Let us explain below.
What is
Good debt
Good debt is typically regarded as an investment in your future. They have low interest rates and have the possibility of allowing you to generate more income. Good debt allows you to manage your finances more effectively, to leverage your wealth, to buy things you need and to handle unforeseen emergencies.
Education
Generally speaking, the more educated you are, the more employable you become. And for most of us, we’ll need some financial help to get a good education. This is a form of good debt as it’s an investment towards your employability with higher pay. In the long run, it will even out against the money you borrowed to pay for it.
Your Own Business
Borrowing money to start your own business can be considered a positive debt because if your business kicks off, it can be very rewarding financially and psychologically, which would outweigh your initial debt. But to ensure success, it takes a lot of hard work, ambition, savvy, and some luck. So, be sure to weigh the pros and cons before diving into this debt.
Property
Buying a property might be the biggest financial decision any of us will ever make. When the time comes and you finally feel ready to buy a home, the common option is to take a mortgage loan. You will then live there for a time and when the land price appreciates, you can choose to sell it off for a profit. You can also generate more income by renting out your property but be sure to do your research because if you fail to meet your debt obligations, the consequences can be daunting.
What is
Bad debt
Generally, a bad debt is when you borrow money to purchase a depreciating asset. If whatever you bought doesn’t go up in value or generate income, then you shouldn’t go into debt to buy it. Expensive debts that drag down your financial situation are also considered bad debt.
Credit Card Debt
Often considered bad debt because of the nature of items that credit cards are used to purchase. You should only use it for convenience and to earn rewards points with the intention of paying off your entire balance on the due date. This is because a credit card debt has high interest rates, usually greater than 20%, which can make your debts higher.
Clothes or Consumables
When it comes to splurging on clothes and other consumable items, if you don’t have the cash for it, don’t buy it. Buying such items with borrowed money can affect your credit score in the long run if you fail to meet your debt obligations. And, it can become a tempting habit which will hurt your financial goals in the long run. So, if you simply can’t afford that designer handbag, don’t think about it. Instead, save up some money every month and circle back to purchase it when you have enough money.
Good or Bad?
It Depends
Cars
A very popular purchase among Malaysians because many see it as a necessity. Depending on who you talk to, a car loan can be a good debt, but it can also be a bad debt. For many of us, a car is essential for everyday life – it helps us get to our jobs, our college or send our children to school. But if your income does not justify the car you purchased and the loan you’ve taken is too much to bear, it becomes a bad debt. Plus, a car is a depreciating asset so think hard before you splurge on that RM300,000 BMW. Weigh the pros and cons before buying a car that you really need.
At the end of the day, it is important to remember that debt can be either good or bad. Good debt is taken to help you achieve your financial goals, while bad debt is expensive and can derail them. It is important to understand the difference and make sure you keep your credit line in check.
REFERENCES
https://www.investopedia.com/articles/pf/12/good-debt-bad-debt.asp
https://www.thebalance.com/good-debt-vs-bad-debt-960029
https://www.nerdwallet.com/article/finance/good-debt-vs-bad-debt
https://www.investopedia.com/terms/d/debt.asp
https://www.debt.org/advice/good-vs-bad/
Good debt
Bad debt
Taking on debt is generally viewed negatively as many people would assume that being debt-free is the way to go. But for most people, borrowing money and taking on debt is the only way to afford important big-ticket items like a home or higher education.
So, what exactly is debt? Well, to start off, debt is something, usually money, borrowed by one party from another and we pay it back in the future. But did you know that there is good debt and bad debt? Let us explain below.
What is
Good debt
Good debt is typically regarded as an investment in your future. They have low interest rates and have the possibility of allowing you to generate more income. Good debt allows you to manage your finances more effectively, to leverage your wealth, to buy things you need and to handle unforeseen emergencies.
Education
Generally speaking, the more educated you are, the more employable you become. And for most of us, we’ll need some financial help to get a good education. This is a form of good debt as it’s an investment towards your employability with higher pay. In the long run, it will even out against the money you borrowed to pay for it.
Your Own Business
Borrowing money to start your own business can be considered a positive debt because if your business kicks off, it can be very rewarding financially and psychologically, which would outweigh your initial debt. But to ensure success, it takes a lot of hard work, ambition, savvy, and some luck. So, be sure to weigh the pros and cons before diving into this debt.
Property
Buying a property might be the biggest financial decision any of us will ever make. When the time comes and you finally feel ready to buy a home, the common option is to take a mortgage loan. You will then live there for a time and when the land price appreciates, you can choose to sell it off for a profit. You can also generate more income by renting out your property but be sure to do your research because if you fail to meet your debt obligations, the consequences can be daunting.
What is
Bad Debt
Generally, a bad debt is when you borrow money to purchase a depreciating asset. If whatever you bought doesn’t go up in value or generate income, then you shouldn’t go into debt to buy it. Expensive debts that drag down your financial situation are also considered bad debt.
Credit Card Debt
Often considered bad debt because of the nature of items that credit cards are used to purchase. You should only use it for convenience and to earn rewards points with the intention of paying off your entire balance on the due date. This is because a credit card debt has high interest rates, usually greater than 20%, which can make your debts higher.
Clothes or
Consumables
When it comes to splurging on clothes and other consumable items, if you don’t have the cash for it, don’t buy it. Buying such items with borrowed money can affect your credit score in the long run if you fail to meet your debt obligations. And, it can become a tempting habit which will hurt your financial goals in the long run. So, if you simply can’t afford that designer handbag, don’t think about it. Instead, save up some money every month and circle back to purchase it when you have enough money.
Good or Bad?
It Depends
Cars
A very popular purchase among Malaysians because many see it as a necessity. Depending on who you talk to, a car loan can be a good debt, but it can also be a bad debt. For many of us, a car is essential for everyday life – it helps us get to our jobs, our college or send our children to school. But if your income does not justify the car you purchased and the loan you’ve taken is too much to bear, it becomes a bad debt. Plus, a car is a depreciating asset so think hard before you splurge on that RM300,000 BMW. Weigh the pros and cons before buying a car that you really need.
At the end of the day, it is important to remember that debt can be either good or bad. Good debt is taken to help you achieve your financial goals, while bad debt is expensive and can derail them. It is important to understand the difference and make sure you keep your credit line in check.
REFERENCES
https://www.investopedia.com/articles/pf/12/good-debt-bad-debt.asp
https://www.thebalance.com/good-debt-vs-bad-debt-960029
https://www.nerdwallet.com/article/finance/good-debt-vs-bad-debt
https://www.investopedia.com/terms/d/debt.asp
https://www.debt.org/advice/good-vs-bad/
https://www.investopedia.com/articles/pf/12/good-debt-bad-debt.asp
https://www.thebalance.com/good-debt-vs-bad-debt-960029
https://www.nerdwallet.com/article/finance/good-debt-vs-bad-debt
https://www.investopedia.com/terms/d/debt.asp
https://www.debt.org/advice/good-vs-bad/
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