08 Mar Good Debt vs Bad Debt
As a general rule, it is important to understand that all debts are effectively defined by the consensus that we as consumers are given money/the chance to spend in the now while only paying back later. The definition of debt is simply stated as “a sum of money that is owed or due”, while differentiating good debt from bad debt is almost always circumstantial.
The subject of debt is often associated with money concerns and poor financial decisions that have led to regret and have, in some cases, been a catalyst to change through services like Debt Review and Debt Counselling. Given how many financial consumers are currently over indebted and seeking the assistance of trusted financial advisors like our team at Less Debt, it is no wonder that bad debt is prevalent and cause for concern. Because of our countries harsh economic climate, continually rising cost of living and scarcity of work, bad debt has overshadowed good debt, but this does not mean that good debt should be ignored.
Any debt that decreases in value once it has been attained can be considered bad debt, while good debt often makes it easier for bad debt to be avoided down the line. Unfortunately for many low to middle class consumers, unexpected changes in cash flow and unmanageable finances result in taking out bad debt in order to maintain basic living expenses. Basic living expenses could include anything from groceries and clothing to car repayments and credit card repayments, all of which are notorious for their high interest rates.
At this point you may be asking yourself what good debt could be, and what separates it from its neighboring counterpart, bad debt? Good Debt stands out in a few notable instances, which our financial team have summarized below:
Debt for educational purposes: Good Debt is often aligned with an individual’s investment in their personal growth and financial worth. Many would agree that debt taken to further ones education, such as a student loan, often ends up paying for itself and proving invaluable. Student Loans typically have lower interest rates and flexible repayment plans, making them much more manageable. Considering that most high paying jobs in South Africa require candidates with degrees and relevant qualifications, an investment in your education is most certainly an investment in your future and quality of life.
Small Business Loans: If you are well-versed, experienced, successful and confident in a specified field or industry, a small business loan could be the stepping stone needed to help you finance your start-up company and run it successfully. With a good business plan in place, the possibilities are endless, however some of the best startup companies are still unable to make it past the first few years. Although small business loans do not guarantee success, these are another good example of investing in your net worth, sometimes proving to be well worth the risk. Before you apply for a small business loan, ask yourself if you are ready to handle the worst-case scenario and make sure that you have a back-up plan in place to avoid potential debt related problems.
Property Investment: It is widely understood that property investment brings with it tremendous benefits, in cases where payment agreements are honored and homeowners have done their research. Instead of paying off someone else’s bond, purchasing rather than renting allows you to pay off your own bond and eventually reap the benefits of owning a fully paid for property. Homeowners can look forward to a potential increase in personal wealth, with long term benefits also including security and equity. Home values also increase over time, making them more valuable to their owners.
For any queries relating to good debt vs. bad debt or assistance with your current financial concerns, check in with our reputable and highly skilled Less Debt team today. We offer a range of reliable financial solutions to South African consumers who need it the most!