We often view debts as a bad thing. The more debts you have under your name, the bigger your financial headache will be. But in reality, this is not always the case. There are times when a debt can help you gain something that has a long term value. For as long as you make good decisions and practice good money management, you can use debt to your financial advantage.
Is There Such a Thing as a Debt That Is Good for You?
Most debts are bad. These are the kind of debts that offers no real long-term value. This includes luxurious items or expensive vacations that do not even help generate more income in the long run.
Good debts are those that can help you finance your life goals. Think of the debt required to buy a house, start a business, or fund your college education. The following are some of the things one can consider as good debt.
- Home Purchase
When buying a house, most people need to apply for a mortgage. This allows them to secure a home purchase even if all they can afford is the down payment. If qualified, you can even get approved for a home loan even when all you can afford are the monthly mortgage fees.
But did you know that even millionaires get a mortgage when buying real estate? For one, they take advantage of the tax-deductible mortgage and interest rates. They can use their cash to fund other investments and grow their portfolio while paying for their mortgage.
- Debt Consolidation
Applying for a personal loan to consolidate debt is another type of good debt. When you have multiple debts, you can take advantage of the low-interest rates in consolidating the debt. The lower interest rates you need to pay, the more savings you can enjoy since you get to reduce your total debt. For example, statistics show that 1 in 3 citizens in Singapore, personal loans and debt consolidation were availed of to help finance their needs.
- Student Loans
We can consider student loans are good debt since it can help boost your future earnings. According to research, college degree holders get to enjoy 31% more earnings compared to those who only have a high school diploma or an Associate’s degree. Once you start earning, you can pay off your student debt.
- Startup Business
When you start a business, you will likely need to take a loan to buy your business essentials or hire employees. Since you can make money for building a business, this helps you build your wealth and repay your lender.
The Problem with Good Debt
Like all good things, this can turn bad if you are not careful. There is a need for enough research, weigh in options, and think things through before taking any debt. The same goes with taking a debt that is more than you need and can afford to pay.
Moderation is recommended when taking in any debt. Don’t take a debt that you are not sure you can’t commit to paying for. Consider your needs and current situation before you even apply.
Before taking a loan, consider if the debt you are going to apply for can help you achieve a long term goal. If not, choose to skip it and save enough money to be able to afford it instead. If yes, don’t take any more debt than you need.
For example, buy a house with a mortgage by taking a loan amount that won’t exceed what you can afford. Even if your lender tells you, you can buy a bigger and more expensive home, refuse to do so. Remember that you will be the one in charge of paying for the loan, so don’t get more than what you can afford.
Good debts can turn sour with improper financial management and making poor decisions. So make sure to choose your battles wisely. Don’t take good debts you can’t afford and don’t need. Avoid financial obligations you know you can’t commit.