With licensed moneylenders in Singapore, many individuals can obtain the right loan for their financial circumstances without any worry. However, not all loans are right for your financial situation. Whether a loan is good or bad for you depends on several factors. Some of these include the capacity to repay, the type of loan, and asking if the loan is a luxury or a necessity.
Here’s what you need to know about the differences between obtaining good debt and bad debt.
A good debt seeks to create assets over time. The three types of loans that are generally considered to be good debts include education loan, home loan and business loan.
A home loan is often considered a good debt to take in Singapore. Unless under extraordinary circumstances, the value of a home is set to increase over time. This makes it a good loan option and a good debt.
Once you can afford a house for yourself, you will not have to pay rent to other homeowners. The money that would have been used to pay rent can be kept as savings, or used to buy furniture in your new home.
Education is considered good debt as once a person fully completes their education, they will be able to apply for jobs and have their own income.
Should you, for instance, take out an instant cash loan to pay off your academic debts, you will be able to seek employment after completing your education and begin to pay off any remaining academic debts or loans.
Typically, a business loan is meant to expand an already existing business or to help entrepreneurs start a new business. Any company that seeks growth can obtain a business loan to help them through the early stages of their business until they begin to make profits and pay off any current and remaining debt.
Thus, this makes a business loan a good debt to have.
Bad debt isn’t disadvantageous. Rather, bad debt is proposed for luxury uses that are not necessary for the individual. Examples of bad debts include borrowing a loan for a foreign trip, using a credit card to purchase items, or obtaining an auto loan.
The reason a credit card is considered a bad debt is because the interest charged on them is extremely high. Even though the purpose of a credit card is useful, it can be detrimental to your overall credit health.
Instead of obtaining a credit card, you can make use of financial management by saving up before purchasing. This way, you will be able to purchase the item without hurting your credit health.
Interest rates on personal loans are high. Thus, you should only take a personal loan when it is necessary. For instance, taking a quick cash loan for an international trip is considered bad debt.
Buying a motor vehicle can add value as an asset. However, taking a loan to buy a car for personal use is often considered as a bad debt. This is because all a car will do is consume your money, through gas prices and Certificate of Entitlement costs in Singapore.
Despite this, buying a car for business use such as commuting to work can also be categorised as good debt as you can save on costs. As such, the reason an auto loan can be both a good or bad debt depends entirely on the reason why you decide to purchase a car.
There is an argument to be made that all debts are bad. However, many people have been able to change their lives through loans. You should always know when is the right opportunity to take a loan, and the reason to take it.