Good Debt Vs. Bad Debt: Isn’t It Always Bad To Be In Debt?

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Good Debts Vs. Bad Debts: What Are The Differences Between Them?

Debt. Just the sound of it is enough to have you trembling and uneasy. It scares many people for different reasons. Some have seen their friends or relatives lose their possessions because of debt and the thought of getting into debt for whatever reason is almost inconceivable.

There’s a lot of misinformation surrounding loans, and many prefer to steer clear of them completely. It is possible to live without accumulating any debt, but that doesn’t make it a good idea. Life comes with so many necessities that may require taking out a loan. Not all loans are bad, you see. There is good credit and bad credit.

What Are Good Debts? Do They Even Exist?

Good debts can be described as investments. While they are loans, these particular loans will bring back returns or benefits in the long run. The amount spent will grow in value over the years.

A good example is student loans. Taking a loan to pay for university opens up opportunities. The graduate will be able to get a better-paying job than if they hadn’t gone to college thus increasing the graduate’s ‘value’ as a potential employee. Supposedly after university, they will be equipped with more skills to complete even more tasks. For loans as such, the interest rates are usually lower. Local banks such as POSB, OCBC and UOB offer such student loans.

What Are The Bad Debts?

Good Debts Vs. Bad Debts: What Are The Differences Between Them?

Bad debts, on the other hand, are debts taken out to acquire things that do not bring in an income and lose their value very quickly. It is also a debt with a very high interest rate. A good example is credit card debt. The way in which credit cards work may make you feel as though you have a disposable income. There will be a huge tendency to overspend. With credit cards, you may end up buying more than what you need. More shoes, more clothes, that branded bag or that expensive watch. With the high interest rates of 22% to 29% per annum, your credit card bill could be an explosive amount if you do not make punctual repayments.

Payday loans are another trap to avoid. They come at very high interest rates, and if you fail to repay the amount on your next payday, the amount incurs another processing fee and of course, the interest keeps soaring. It can get you into an endless cycle of debt, making it feel almost impossible to repay your debts. If that happens, individuals can seek the help of banks or licensed money lenders in Singapore for debt consolidation plans. 

Using Credit For Good 

However, debts and loans can turn a difficult situation around if considered carefully. It is possible for debts to increase your net worth.

What options, then, can be considered good debt?

1. Student Loans

This is an investment in your future. The interest rates are low. To keep it in check, make a projection of earnings a year after graduation. Try and ensure your student loans don’t exceed 20% of this figure. That way you will be able to pay back student loans and still have some money left over for living expenses and personal savings. Ask about the available repayment options like income-driven repayment and refinancing to keep up with the loans.

2. Mortgages

Many looking to own homes consider this the best path. Owning a home provides a sense of security and ensures one has a roof over their head whether they are earning a salary or not. Consider the amount of money you can afford to have slashed from your salary every month for the next decade or more before you take a mortgage.

Wisdom would be to keep it at around 35% of your income.

If the numbers don’t add up, look for a cheaper neighborhood, scale down the house or consider refinancing. Housing costs should not take up the bulk of your income.

3. Car Loans

Although it is expensive to own a car in Singapore, many people still want to get one. Getting around to daily commitments without a car can be a real hassle. It is even better if the vehicle will be used for business thus bringing in more money. Try and limit the loan term to four years or less, with total auto costs of not more than 20% of your income.

4. Personal Loans

Personal loans can come in handy if they are being used to consolidate debt. They are a bad idea if taken out for expenses such as wardrobe overhaul or a vacation. Such expenses can become expensive and addictive thus easily running you into deeper debt.

Ask yourself why you need the money and whether you need it now. This should help decide whether to take that personal loan. Using it to offset a high-interest debt is a wise way to use it. It keeps you from paying too much in the long run and brings in order and structure when paying back since payments are split evenly every month. This is more predictable and helps manage cash flow.

Conclusion

Undeniably, loans have helped many get out of sticky situations. Loans have also gotten others living in depression, wondering how to dig themselves out. Debt can be good. Be careful even with the good debt because too much debt of any kind can easily become bad. It’s a slippery slope from there. How can one avoid bad debt? If you don’t need it and cannot afford it, definitely don’t buy it.