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Good Debt vs. Bad Debt

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. Of the four, spending stands out as the most practiced. It is also the activity that links directly to debt. As such, there’s a need to make a distinction between a good debt and a 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 being implemented by nearly all retailers today changed consumer behavior radically. In this marketplace setup, customers are drawn to spend with ease. They have the luxury of purchasing items in a physical store, through online shopping or ordering 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 is to spend more. Because consumers want to buy as many items, a personal loan or credit card is used to satisfy those desires.

  • 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 for leisure and entertainment. Non-essentials take precedence. That’s the natural human mindset. A Business Monitor International (BMI) research predicts the same thing will happen in MalaysiaIn relation to debt, the downside here is the likely increase in loanable amount. With added money to amortize, the temptation to borrow more is greater.

The differences between good debts and bad debts

A debt can either be good or bad. It depends on how you will spend the loan proceeds or the purpose 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 you don’t actually have the capacity to pay.

Good Debt

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In order to simplify the delineation, a good debt is money borrowed that will deliver long-term value or income in return. Home mortgage, business loan, and education loan 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 the additional working capital. An education loan provides tangible benefits as well because it’s an investment for the future in exchange for the quality learning you will acquire today. You’re 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. A car financing is justified if the purpose is for ease of transport and everyday mobility. Buying a luxury car through financing is not considered a good loan. On the contrary, it’s the extravagance that will drain you financially.

Another example of a 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 utilized in the 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 give 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’re 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’re in no position to pay, it means you ended up with a bad debt.

Be an intelligent borrower

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Debt handling follows a certain routine. Every time you borrow money, your personal 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’s 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.

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