When I was growing up, I was taught that debt is a bad thing. That it’s up there with procrastination, swear words, and AIDs. I didn’t even touch a credit card without tongs till I was 25, because I thought skin contact with credit would turn me into a drunk, fat, womansing drug dealer. Today I know better. I’ve dealt with many kinds of debt, and am still not a womaniser.
Good Debt versus Bad Debt
Good debt creates an opportunity that would more than repay itself. If I borrow $15 million to build a condo, and then sell condo units to earn $25 million, that would have been a good debt.
Bad debt never amounts to more than a liability. If I break my leg and have to borrow $500 for treatment, the best outcome is me managing to pay back that $500 (assuming an interest-free loan).
Here are four “good debt” circumstances, in which not borrowing would be a dumb move:
1. Education Loans
These days, a degree is no longer a pre-requisite for success. You know that’s true because it’s said by people who earn six-digit incomes, and therefore have a deep understanding of everyday realities.
But let’s say you want to do something wacky instead.
Like, say, listen to the actual people who might hire you. Then you might find a degree means earning $1,200+ or more per month, compared to your diploma or ‘o’ levels. The only problem is that degree courses are expensive – mostly in the $35,000 range.
Is it worth taking an education loan for it?
Almost* all the time, the answer is yes. An extra $1,200+ means you’ll cover the cost of the degree in about two and half years. Over the course of a 30 year career, an education loan will pay for itself many times over.
(*Exceptions exist. Job markets fluctuate, so there may be periods when a degree doesn’t pay off quite as much. There is some risk involved.)
2. Home Loans
Home loans are good for two reasons. First, it gets damned uncomfortable on park benches at night. Second, owning property can lead to capital gains – you could sell the house for much more than you bought it.
For most Singaporeans and Permanent Residents, home loans are more financially prudent than renting. If you rent a house for 15 years, all you get at the end of it is a landlord with a yacht. If you own a house for 15 years, even on borrowed money, you can at least sell it as an asset.
Mind you, this is a simplification. In order for a home loan to pay off, you need to ensure the interest rate doesn’t exceed the eventual profit when you sell. And, of course, you need to pick a house that has a good resale value.
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3. Business Loans
Whether you’re expanding your business, or starting up something on the side, loans are your friend.
Every business needs working capital. You need money for office space, staff, marketing, etc. One of the worst things you can do is to tap into your own finances, and pay for all of it upfront. If you do, you’re about to find out the biggest business expense is optimism.
Clever use of loans ensure that, even if your business fails, you’ll be paying a manageable amount every month. But if you emptied your bank account, you’ll be living on credit for months after the business fails, and you’ll struggle twice as hard to recover.
Also, the loans might empower your business to do something that will more than repay it. Like get a proper marketing program in place, or a store front that doesn’t immediately scream money launderer.
4. Debt Consolidation
This is when you get a loan to end all loans.
Let’s say you have outstanding debt on three or four credit cards. Every month, those cards grow your debt at 24% per annum. Instead of coping with all those separate repayments, you could get a single personal loan to pay off all the cards at once.
Then you only service that one personal loan, which is also at a lower interest rate than the credit cards.
End result: you will have more disposable income as you repay the loan, and you will pay a lot less in the long run.
Consider using our Personal Loan Wizard if you need to find a cheap personal loan for this. We work with all local banks, so we’ll get you the cheapest deal possible (for free).
Got any debts you regret? Comment and let us know. We may be able to find a way out for you.