Loans are a part of life. We can’t really avoid taking a loan in the modern world where everything is so expensive. We can’t wait to save enough cash. Loans help us to get the assets that we need such as house and car. These are good loans or good debt. But there are also other types of loans that are not really beneficial to our financial well-being. These are bad debts. So let’s see which of the loans we should rush to get and which ones we should try to avoid.
You sign up for a 30 year loan on a house. It sounds weird but this is a good debt. You are considered a mature and responsible person when you sign up for these debts. The reason? You are purchasing an asset for your future wealth. And good debts mean you are using other people’s money to buy your assets. Sounds great when you put it that way. Good debt eventually helps you generate income and build wealth. For example, a house will usually increase in value over a period of many years, especially a landed property. A house is considered an investment because it will grow in value. You can sell it later on at a profit.
A good debt maybe has lower interest rates and it can be considered an investment that will grow in value.
Another example of a good debt is a student loan. When you have graduated with a degree, presumably you can use it to generate more income and increase your net worth over the long term. Student loans normally have a very low interest rate too, especially government loans.
What we would consider to be a bad debt generally is used to purchase things that decline in value. For example a car is not an investment because it doesn't increase in value but rather loses it value quickly. You may use your car to go to work or even for delivery service, but it is better to buy a cheaper car and not take on too much debt for a long term.
A bad debt is used to buy something that offers little chance of generating returns, such as an overseas holiday. Also, Any debt which has a very high interest rate is probably a bad debt.
A Credit card is probably the best example of bad debt. The interest rates are very high and it will take a long time to pay for your purchases if you only pay the minimum amount monthly. Using a credit card could diminish your net worth and future cash flow. Once you have a credit card you will be paying it every month forever.
You might need to use a loan to buy necessary items when you're first starting out, for example furniture and home appliances. Make sure you know how much you are paying for the items. You may end up paying double the cash price when you have finished. Think about whether it might be cheaper to take a personal loan or even an interest-free payment with your credit card. On the other hand as you get older and earn more, you should be able to replace your TV and other appliances with cash. If not, maybe you are just spending too much.
The last kind of debt I want to question here is a Personal loan. This kind of loan is very popular because you will get cash and you can buy anything you want such as clothing or gadgets. It depends what you want to buy with this loan and how much the interest rate is. For example if you take a personal loan to pay the legal fees on your house purchase, that is an investment and worth doing. But if you take a personal loan for your Raya spending, new curtains and clothes, that is something that will not give you any return in future. Watch out for the high interest rate with personal loans.