Good debt explained
There is such a thing as good debt, and in this article, we break it down for you.
Today being in debt is a fact of life. No matter who you are or where you live, chances are you’re in debt, either from mounting credit cards, personal loans, or all the above. However, not all debt is bad; in fact, living a completely debt-free life is not necessarily a good idea either – despite its bad reputation.
Read: Types of debt in South Africa
If managed and monitored correctly, debt can be beneficial . Whether you’re in good debt or bad debt differentiating between the two can be tricky. People are unaware of the consequences of being over-indebted – or how maintaining a good credit rating is essential to a prosperous financial future. They are unaware of the purchases that are worth getting into debt for and the ones that are not due to a lack of financial education.
We at Debtline want to help you make better, more informed, and responsible decisions when making important credit purchases.
Good Debt
Debt, for most people, is unavoidable, as many of us start adulthood with crippling debt. However, there are ways to use debt to your advantage. “It takes money to make money” is the best way to understand what ‘good’ debt is. Good debt is money borrowed for investments that grow in value or generate a long-term income – tangible or less measurable, like education.
Good debt is an investment that will not negatively impact your current financial situation but rather benefit from it.
1) Education Loans
Loans for education are like the poster child for good credit debt. They are the prime example of an investment that adds extensive value to the possibilities of your future. Not only do educational loans have very low-interest rates, but in furthering your education, you increase your employment possibilities, which increases your chance of a suitable and stable income.
Despite these loans having long-term repayment plans (20-30 years), their relatively low monthly payments free up excess cash flow for other expenses or emergencies.
2) Property Loans
Property investments are also renowned for their good debt reputation. It is one of the most popular investments for good debt. Unlike other forms of credit, property investments have relatively low-interest rates, plus the interest is tax deductible – saving you heaps.
Property is one of the best investments you can make because houses, unlike cars, increase market value over time, guaranteeing you a return on your investment – or enough to eventually cancel out the interest you paid.
3) Debt Consolidation Loans
Debt consolidation is another type of ‘good debt’ that can improve your financial situation. Debt consolidation is a way of debt refinancing designed to simplify paying off multiple debt repayments into one singular smaller payment rather than paying off a lot of different accounts.
A Debt consolidation loan is a cheaper way to control your finances as you can borrow one single sum of money at a lower interest which you can use to pay off the rest of the money you owe while at the same time paying off all your accounts while only having one single source of debt.
Our NCR-registered debt counsellors can assist you in consolidating your debt based on what you can afford.
4) Home Equity Loans
Home equity loans are considered ‘better’ debt as they are neither bad nor good. Creditors use your house as collateral with the amount and interest rate depending on the appraisal of your house. Thus, offering lower interest rates than other forms of credit.
A home equity loan may be a smart alternative way to consolidate multiple debt payments, but be sure that you have carefully considered whether you will make your payments each month. If not, you might be at risk of losing your home.
5) Business Auto Loans
Business auto loans, like home equity loans, are also considered ‘better’ debt. Buying a car is notoriously considered a ‘bad’ debt purchase as the car loses its value over time – opposed to gaining it. However, if your car purchase is for business, an auto loan is invaluable as it helps your business which in turn helps your income.
