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Good Debt vs. Bad Debt

(This article was originally published on the 29th March 2018 and updated on the 11th February 2020). 

The least regarded aspect of personal finance is handling indebtedness. The scope of personal finance extends beyond managing finances. Many focus mainly on the concept of savings, earnings, investing, and spending. Out of the four, spending stands out as the most practiced. It is also the activity that links directly to debt. As such, there is a need to make a distinction between good debt and bad debt.

The Correlation between Debt and Spending

Establishing the connection between debt and spending is fundamental. Borrowing is a fact of life in Malaysia and elsewhere. In most cases, a person’s debt piles up for no justifiable reason. Hence, it is crucial to point out what triggers spending. These triggers can often lead to unnecessary spending and eventually inflated debts.

Change in Spending Behavior

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The omnichannel strategy is implemented by nearly all retailers today changed consumer behavior radically. In this marketplace set up, customers are drawn to spend with ease. They have the luxury of purchasing items in a physical store, through online shopping or order by phone.

The convenience of shopping using various channels promotes the so-called shareworthy experience rather than the quality of goods. Its impact is somehow negative because customers are side-tracked. Unconsciously, the tendency to spend more is higher. According to a recent survey, approximately 43% of Malaysians spend more or exactly on what they earn. The results are pretty alarming if this situation continues. To satisfy those desires, many consumers turn to personal loan or credit card.

The Rise in Disposable Income

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Everyone welcomes an increase in disposable income. Regardless of income status, an upgrade means additional money to spend on leisure and entertainment. Non-essentials take precedence. That is the natural human mindset. In relation to debt, the downside here is the likely increase in a loanable amount. With added money to amortize, the temptation to borrow more is greater.

The Differences between Good Debts and Bad Debts

Debt can either be good or bad. It depends on how you will spend the loan proceeds or the purpose of why you need to borrow. Before you borrow and pile up those debts, evaluate and decide with caution. You might regret the decision later on. It will come as a shock to find out if you do not have the capacity to pay.

Good Debt

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To simplify the delineation, good debt is money borrowed that will deliver long-term value or income in return. Home mortgage, business loans, and education loans are examples of good debts.

All these loans will serve a lasting purpose. The home mortgage allows you to purchase a house that you will eventually own. The expansion plan of your business can be implemented with additional working capital. An education loan provides tangible benefits as well because it is an investment for the future in exchange for the quality learning you will acquire today. You are putting in good money for something of real value. Thus, the motivation to make prompt payments is ever-present.

Obtaining a car loan can either be good or bad. Car financing is justified if the purpose is for the ease of transport and everyday mobility. Buying a luxury car through financing is not considered a good loan. On the contrary, it is the extravagance that will drain you financially.

Another example of good debt is a personal loan with low interest. This type of loan can serve any of the loan purposes mentioned. For as long as the funds will be utilised in a similar fashion, seek out the loan provider with the cheapest rates. Also, it is not advisable to max out your credit card limits for the above and pay steep rates.

Bad Debt

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A hard pill to digest is an overblown debt balance that resulted from excessive expenditures. Bad debts are those loan obligations that instead of prospering, it makes the borrower a pauper.

The proliferation of electronics items, smartphones, gadgets, branded clothing, cosmetics, and other consumer durables gives rise to impractical spending. Throw in some more like spas, aesthetic clinics, cosmetic surgery, and other beauty enhancement products. All these are ingredients for a borrowing recipe.

Think seriously whenever you are tempted to ride on global trends. These goods or services are availed on whims, not practicality. Thus, it neglects forward planning and frustrates the better alternative of saving before spending. When payment due dates come for your loan or credit card, and it turns out you are in no position to pay, it means you would end up with bad debt.

Be an Intelligent Borrower

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Debt handling follows a certain routine. Every time you borrow money, your cash flow increases. However, regardless of the loan size, you must manage your debt. You have to ensure that payments are updated. Extra effort and discipline are also required to avoid incurring new debts.

In conclusion, the most important yardstick when taking on a loan or purchasing on credit is to determine if it is a good debt or bad debt. Will it drain you money-wise or will it provide real worth? A clever borrower would make use of a personal loan as a helpful financial tool. Planning for your borrowing and assessing payment capacity will not cause any financial stress. Keep in mind that it is better to be debt-free than be trapped in a debt cage.

This is article is prepared by Direct Lending – an online personal lending platform, providing you with a fast, simple, safe and affordable borrowing experience. If you are seeking a personal loan or you have any finance-related questions, our team of friendly loan consultants are ready to help you. 

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