Know your good debt from your bad debt

Many people are trying their best to lead a debt-free life. Even though it has its perks, incurring debt can also be a good thing. You just need to differentiate between good debt and bad debt.

In short, good debt helps you generate income and bad debt doesn’t. Below are examples of good and bad debt:

Good debt

Home loans: Buying a house or any property requires a significant amount of money, and not many people can afford to do that in cash. Home loans tend to have a longer-term, but the interest is low.

Like any secured loan, they carry little risk for creditors because they can sell the house to another person if you are no longer able to pay. In addition to this, a house can be seen as an investment, since you can either sell it or rent it out if you no longer have the desire to stay in it.

Vehicle loans: If a vehicle is going to make you money, then buying it on credit is justifiable. If it is going to add more stress, perhaps you should start saving and pay for it in cash. A car is a depreciating asset — meaning its value decreases with time. And you may need to purchase a new one before you even finish paying for your current one.

Student loans: Taking a loan to finance your or your children’s studies is never a waste of money. You’re investing in a human being. Higher qualifications can lead to a promotion, a raise, or a better-paid position. Just pay your monthly instalments regularly to avoid being adversely listed with the credit bureau.

Bad debt

Credit cards: Credit cards can come in handy especially in the case of an emergency, and they can easily help you build your credit score. Yet, a credit card is bad debt because its interest is high and it is seldom used to buy income-generating assets. If you really need a credit card, only have one and only use it when you have to. It should be your last resort.

Personal loans: Taking out a personal loan is not that bad if you can justify the reason. Did you take it to pay for your holiday? Not a good idea. A personal loan is too expensive to spend it on luxury. It is an unsecured loan — meaning that the interest is high. Is that holiday worth the interest?

Payday loans: Like credit cards, payday loans can help you when you are in a tight corner, but it’s not recommended. Try to avoid it. The interest on these loans is excessively high, and you don’t want to get into a never-ending debt cycle.

DebtBusters can help you break the cycle of debt. Speak to our consultants on 086 999 0606 or email us at info@debtbusters.co.za