Good VS Bad Debt: How To Differentiate Between Them


When one thinks of debt, one usually immediately jump at the idea that they’re all terrible. After all, when you owe another entity or organisation a considerable lump sum of money, how else would you describe it as?

Contrary to popular belief, not all debts are entirely bad! In fact, debt is primarily categorised into two types: good debt and bad debt. Knowing how to differentiate between the two will help you better choose the type of loans that can help you alleviate your financial distress.

Good Debt

As a general rule of thumb, good debt is best understood with the old adage, “it takes money to make money.” If the additional financial assistance helps you to accrue even more money and increase your overall net worth, then the loan you’re applying for can be considered positive. Here are just some of a few things that may be worth to go into debt for:

University Education: Generally, the higher the education level, the higher one’s earning potential will be. Better educated workers are more likely to be employed in excellent-paying jobs, especially if they’ve decided to work in a related field. An investment in a university degree is most likely to pay for itself within the first few years of entering the workforce. That said, to further maximise the value of taking on debt for education, you’ll want to pursue a degree with an excellent career path or income, lest the good debt develops into a bad one really quickly.

Small Business Ownership: One of the most straightforward ways to generate more income is simply starting a small business of your own! Not only will you bypass the need of a third party to give you your monthly income, but you’d also be able to decide how best to develop and grow your own enterprise. That said, similar to educations, operating a small business also comes with its own risks. As with any other businesses, there is a possibility of it failing. As such, you’ll want to make sure that you have safety nets in placed and surround yourself with people who can give you help whenever you need it.

Bad Debt

Bad debt is simply the antithesis of what a good debt entails. When you’re applying for loans to help you pay for depreciating assets, you may be losing money instead of generating more income. Some of such notable items include:

Cars: Many often think that purchasing a private vehicle is often regarded as an investment. This is partially true and false. In the case of Singapore, wherein public transport is not only efficient, but also cost-effective, investing in a private vehicle may not be smart purchase. Especially with the exorbitant price tag and its yearly maintenance costs, you may lose money instead. A car will only be an investment if you can genuinely afford it, and if you’re searching out for a personal loan moneylender to help you finance this purchase, your financial health may be collateral damage.

Credit Cards: Whilst commonplace, credit cards are one of the biggest reasons why many accrue debt seems to be never-ending. As one of the worst forms of bad debt, such loans often incur a high-interest rate.

Neither Here Nor There

Of course, classifying debts into these two categories is not as black and white as many seem to think. Several other factors help determine which camp a particular debt resides in: your current living situation and financial health, amongst many other things. For instance, those who have accrued an enormous amount of debt can search for a debt consolidation company in Singapore to help consolidate and pay off the debt with a loan at a lower interest rate.

Conclusion

Debt isn’t always bad, but it’s not always good either. One has to also factor in their financial health and current living situation to better choose a loan that best benefit you.

We strive to take the extra mile in helping you ease your financial burdens. As an honest, licensed moneylender in Hougang, we’ll make sure to guide you through the entire process so that you can make the most informed decision. Settle your financial woes with us here.

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