Is debt ever a good thing?
Whether it be for education, a house, a new car, or to cover an unexpected excess amount to your insurance when you damage that car, most of us will at some point in our lives need to acquire debt. The problem is, while debt might start out as a necessity, due to the rising cost of living and fluctuating economies, it can very easily spiral into an unending nightmare of constant worry and despair with consumers not knowing whether they will ever be able to escape the debt trap.
One thing is clear though, whatever the cost, whatever the cause, overwhelming debt wreaks havoc with our mental and physical health. Some of the apparent effects include stress related illnesses like hypertension and heart disease, low self-esteem, and general impaired cognitive functioning. In this state, the consumer cannot learn, remember things, be attentive, or solve problems at their work or daily social lives.
So, it is quite evident that debt can very easily be bad for you, but can debt ever be a good thing?
Well, yes. Aptly epitomized by the old adage “it takes money to make money,” good debt refers to any debt that can increase your net worth and generate value on an ongoing basis. For as long as you can afford it, debt that improves your and your family’s life in significant ways is definitely good debt. Debt can also be considered constructive if it helps you generate an income and build your wealth.
Great examples of this include student loans, home loans, and vehicle finance. Personal loans could also be seen as good debt when used for “good,” for example purchasing a sewing machine for the purpose of generating an extra income by making and selling clothes. Moreover, acquiring debt might actually be essential as you need to build up good credit to be able to obtain the things you need, from a mortgage to a higher overdraft limit.
The key is to make sure that you can afford the debt you sign up for and also to keep up with all your debt repayments. Even for essential debt like education, affordability can be the defining factor for whether your student loan is good or bad debt. This is because while all education is important, it is no secret that some career paths present more monetary value than others. As a rule of thumb therefore, your student loan should not exceed the money you stand to make from your qualification in your first year of employment. For example, if the average starting annual salary for someone with the qualification you wish to pursue is R100 000, then your student loans should not be more than that. This will enable you to keep up with interest rates on your debt and successfully pay it off within the 10-year repayment window.
The same applies for business loans and property loans. Firstly, always make sure that you can afford the monthly loan repayments, and secondly, ensure that your return on investment is worth the total repayment amount. Maintaining a good repayment history is crucial for whichever type of debt you acquire because it affects your credit score. Your credit score, in turn, affects an array of life experiences, including whether you can take on more credit, get a certain job you aspire to get, or apply for credit at low interest rates.
According to Founder and Debt Counsellor at National Debt Advisors Sebastien Alexanderson a person’s payment history is essentially the defining factor between good debt and bad debt. He said some examples of bad debt include irresponsible debt, like borrowing to gamble or buying something you don’t really need; rolling credit card debt that is not settled each month or the use of the “budget” facility on the credit card; regular short term/pay day loans or going over your overdraft limit; and finally, consolidation or stop-gap debt which is used to repay other debt.
“Bad debt negatively impacts your credit score and may affect your life in horrific ways. Good debt, on the other hand, allows you to manage your finances more effectively, cover unforeseen financial emergencies, and can teach you how to budget and manage your money effectively,” said Alexanderson.
If you are struggling with debt – contact NDA today, we can help you make your debt good again.