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Good debt, bad debt
2021-08-16 00:00:00.0     星报-商业     原网页

       

       WHICH debt of yours is good and which is bad – this is something you ought to ask yourself.

       If you can identify it, then you will be able to get rid of the bad debt sooner than later. Otherwise, it keeps building up and affects the quality of your life.

       Taking on debt is something many need to purchase homes, cars, education or even getting married.

       But even good debt can turn bad if it is not managed properly. So it is important to pay attention to your money if you don’t want to grow your debt, experts say.

       Of course, the Covid-19 pandemic is unprecedented and loan moratoriums are a short term relief. But a debt once taken, needs to be paid.

       “Fire has good uses such as keeping you warm or lighting up dark places. However, if used wrongly or if you are not careful, the effect can be disastrous,’’ said Kimberly Law, a licensed financial planner with IPPFA Sdn Bhd.

       She believes “a debt is the same as fire. Debts in general, is paying something at a higher cost. Determining whether a debt can be good or bad depends on the situation and purpose. It is not the same for everyone.’’

       Her interpretation of good debts are those that make you financially better such as a study loan, mortgage and business loan. It serves a bigger purpose with equity or earnings potential in the future.

       “Fire has good uses such as keeping you warm or lighting up dark places. However, if used wrongly or if you are not careful, the effect can be disastrous,’’ said Kimberly Law, a licensed financial planner with IPPFA Sdn Bhd. She believes “a debt is the same as fire. Debts in general, is paying something at a higher cost. Determining whether a debt can be good or bad depends on the situation and purpose. It is not the same for everyone.’’

       However, “bad debts generally make a person financially worse off,’’ she said.

       To her, credit cards are considered as bad debts because they typically come with higher interest rates.

       A report said, with credit cards you are usually spending on things that have a depreciating value, which means they are losing value over time.

       The report added that, it is best to keep your debts not more than 36% of your total gross income.

       “Bad debts are loans with ridiculously high interest rates such as personal loans and illegal money lendings (from loan sharks),’’ she adds.

       Credit card debt is also considered a bad debt if you spend above your credit limits as typically credit card charges high interest rates. On top of that, if you pay late, there is compounding interest and late payment charges.

       When taking on debts, the rule of the thumb is to take on what you can comfortably repay in monthly payments.

       If you happen to be a borderline case in your bank’s analysis of credit ratings, it simply means you could potentially face problems in repayments, she said.

       ”For example, if you rush to buy a house without proper planning, you might struggle on mortgage repayments and the mortgage can turn bad,’’ she adds.

       It is the same for study or business loans when defaults can turn good loans to bad ones, so it is best to be practical when taking on debts.

       It is just like buying a car within your means and not buying something that will be a liability later. Taking on debt has its cost and benefits. The debt should help generate more returns than the cost of borrowing.

       “An ideal situation is where you have a good chance of getting more in return for taking the loan. One example is studying a course that helps you get a higher paying job or getting a business loan that helps you generate more income to pay off the cost of borrowing,’’ she adds.

       What could potentially drive you to take on more debt than what you can manage?.

       One factor is the need for instant gratification – wanting to own assets fast without thinking hard about the additional cost and repayments, Law said.

       Societal pressure is another factor when image and status become paramount, so is family pressure.

       Law said desperation in wanting to keep an asset by using more loans to cover existing loans is also a factor.

       “Worrying about loan repayments to pay for commitments like a house or car can affect one’s mental health and decision-making. Desperation can make someone be tempted to borrow from loan sharks and easily fall for scams,’’ she adds.

       Often bad cash flow management is cited as a factor too.

       “It is about spending money that you don’t have. Using a credit card to spend future earnings, opting for an installment plan or taking up personal loans to pay for basic necessities. This is due to lack of savings and poor financial management,’’ Law said.

       She adds that financial literacy is key to accumulation of wealth and to avoid getting into a bad debt situation.

       Before you take your next loan, ask yourself if the debt will pay you more than what you put in. If not, don’t take it. As Law said “don’t take a loan if you cannot justify the cost of interest and purpose.’’

       


标签:综合
关键词: debts     loans     credit     repayments