Before taking out any loan, you should know if it will be a good or bad debt for you. Don’t know how to differentiate between the two? Find out how a debt can be good or bad, and learn how to manage your debts wisely!
What is a Good Debt?
A research study showed that 68% of Malaysians are currently in debt, with most of these debts being incurred due to high living expenses, rental payments, and children’s education. And with the surging increase of Malaysian household debt, Bank Negara Malaysia has now introduced stricter lending rules in order to contain the situation. According to AKPK, most Malaysians who seek financial help from them usually cite overwhelming credit card debts.
By definition, a debt means you borrow money from another individual or a financial institution for a period of time for which you will pay back the amount you borrowed along with interest. For most of us, taking on debt via loans is necessary because we often don’t have enough cash to make essential purchases. What makes debt good or bad, however, is defined by the impact that it will cause in your financial life; whether the impact is positive or negative.
Good debt is one that helps to enhance your financial position over a long (or even short) period of time. There should also be clear and specific reasons behind you taking out the loan. For example, taking out a loan to grow your business makes it a good debt as the loan will help to increase your net worth. Good debt can also be characterized as below:
- Increases and adds to your net worth
- Helps your money grow
- Affordable repayments
Examples of good debt
A survey ranked Malaysia as the fifth most expensive country for higher education – explains the reason why many Malaysians are in debt due to financing their children’s education. Granted, higher education can be a pricey affair and this can lead to parents or even students having to take up loans to finance their studies.
However, as David Bok, a former Harvard President, said, “If you think education is expensive, try ignorance.” Having higher qualifications helps secure better jobs, increasing chances of future earning power. As an investment; taking up an education loan is a type of good debt.
Taking up a loan so you can put it into investment vehicles such as a fixed deposit or Amanah Saham Bumiputera (ASB) can be a good investment too, provided you know what you are doing. The main rule is to ensure that what you earn from the investment will be more than the interest or expenses incurred to you for the loan.
What is a Bad Debt?
Bad debt is characterized as a type of debt which does not add any financial value to your life. Aside from that, a bad debt can also be one which costs you more money in the long run. Other characteristics of bad debts include:
- Buying items that depreciate over time, such as a car
- Unpaid credit card debts
- High-interest loans
An example of bad debt
Credit card debt
A credit card can be a powerful financial tool, if used correctly. However, it can turn into a bad debt when you use it to make large purchases but only make the minimum payment each month – or worse, pay it AFTER the due date. These will incur unnecessarily high charges and interest, not to mention risking a bad score on your credit report.
Tips to Manage Debt Wisely
Contact your loan provider or bank immediately if you have difficulties meeting your loan repayment schedule. Chances are the banks will be open to negotiations as they will also want to minimize the chances of a non-performing loan (meaning unpaid loans). Before things get messy, try to work something out with your bank.
Alternatively, you can also reach out to Agensi Kaunselling dan Pengurusan Kredit (AKPK), also known as the Credit Counselling and Debt Management Agency, established by Bank Negara Malaysia. Their services are free, and they offer counselling and advice on financial management and also assist individuals with their debt problems through their Debt Management Programme.
Before taking up a loan, compare loans from banks as this can help you to get the best interest rates. You can skip most of the hassle using the tools like the free personal loan comparison tool from CompareHero.my.