Is It Always a Bad Thing To Take a Loan? Here’s the Difference That Good Financial Management Makes
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Singaporeans are well known to be very “forthcoming” when it comes to offering advice, but sometimes it can come across as extremely general and even misleading. My parents were no different and as an example, one lesson my parents taught me was that debt is bad. Don’t take loans and even if you do, pay your loan as quickly as possible.
But here’s the thing – It really boils down to how you manage your finances, and good debt can actually help you manage your finances better. So, how do we differentiate between good debt and bad debt? We take a look at some important differences here.
Wait a minute… Isn’t all debt… bad debt?
We’ve all heard horror stories about how debt ruins families, about how people desperate for money borrow from unlicensed moneylenders because they feel like they have no other recourse.
And then, there are the horror stories of people with huge credit card debt amounting to as much as 24 times their monthly salary! How crazy does that sound? Thankfully, measures have been put in place to limit the total borrowing allowance for unsecured credit to just one year’s income which will be enforced come June 2019.
Essentially, bad debt refers to loans or money you owe that is beyond what you can manage. Good debt, on the other hand, refers to loans that are within your financial means and gives you more in return.
What are examples of good debt?
Examples of good debt are taking a loan for home improvement or upgrading your skills. Taking a loan can also help to break down a much larger purchase into manageable amounts as well.
So where do personal loans come in? Well, whether a personal loan is good debt or bad debt all comes down to one simple question: Why do you need the money now?
It seems like the most obvious question in the world, but you’d be surprised how few people consider this before taking on a loan. And let’s get things straight here – it’s not the loan itself that is bad, but the way in which it is used that needs to be thought through. Similarly, credit cards are not what some people might paint as being “evil”, it’s actually the misuse of the product itself that leads to financial difficulties.
Of course, things aren’t always black and white. Here’s an easy reference graphic to show you what’s good debt and what’s bad debt:
How should I manage my debt?
While debt seems scary, if well managed, taking a loan can be a viable option in various circumstances and can help you improve your credit score.
Taking a personal loan is not going to make your debt go away, but it may significantly reduce the amount of interest you have to pay on your existing debt, and help you manage your cashflow better, which is the key point in all of this. Here’s a simple example of how you can turn that high interest credit card debt around:
Imagine if you had a S$20,000 credit card debt to clear and you paid S$500 each month. At an interest rate of 24%p.a, it would take you close to 7 years and you would’ve paid more than $20,000 in interest!
If you took out a personal instalment loan of S$20,000 to pay off your credit card debt, you could pay $481 per month for just 4 years at an interest rate of 3.88%p.a (EIR from 7.63%p.a.^). What’s important to note here is that you are paying way less in interest and you also pay off your debt in a much shorter period of time.
Also, a personal loan gives you a disciplined and structured way to pay back debt by splitting up the payments evenly, so if you’re the sort who hasn’t been too conscientious about repayments, this “enforced” repayment will help you better deal with your debt and in a more disciplined manner which will help you manage your cashflow in the long run.
What are your thoughts on managing debt? Share them with us here.
Should you need to get a personal loan for the above reasons mentioned in the article (the good ones, of course!), Standard Chartered Bank (Singapore) Limited (“SCBSL”) is now offering a CashOne personal loan with the following promotional features (accurate as of March 2019):
- MoneySmart Exclusive Rate: 3.88% (EIR from 7.63% p.a^.) for ALL tenures and loan amounts from $1,000 – $250,000
- Get Cash the very next working day*
- S$199 cashback offset first year annual fee.
CashOne Comparison Sites (MoneySmart) Campaign Terms and conditions apply. Click here for full Terms and Conditions.
^The EIR for the applied rate of 3.88% p.a. is calculated based on a loan amount of S$20,000. The calculation has taken into consideration the first year annual fee of S$199.
*Standard Chartered Bank (Singapore) Limited Next Day Cash Terms and Conditions apply. For full terms and conditions, refer to https://www.sc.com/sg/terms-and-conditions/next-day-cash-terms-and-conditions/
All Standard Chartered Bank CashOne Personal Loan applications are subject to SCBSL’s loan approval process at its sole discretion. For more information on the Standard Chartered CashOne Personal Loan, visit sc.com/sg/CashOne now.