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Good debt vs bad debt: Get clued up!

2016-05-04 13:52

Image: iStock

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A large percentage of the South African population is currently in debt and what is not always fully understood is that debt is not just debt; there are in fact different types of debt.

The two types of debt that you may find yourself in are: good debt, and bad debt.

It is exceptionally important to be able to identify what kind of debt you are getting yourself into when you are purchasing on credit, getting a loan, or planning monthly repayments, as the two different types of debt each have their own benefits or downfalls.

Let’s take a look at the different types of debts and examples of each:

Bad debt is generally a negative form of debt as it is detrimental to your long-term wealth. This is the case due to the nature of the purchased items not generating a long-term income and having a depreciating value.

Bad debt is incurred when you continue to purchase non-essential luxury items on your credit card, even though you are already struggling to make your monthly repayments. Examples of non-essential luxury items may include extravagant buys on smart TVs, gaming consoles, and even taking out pay day cash loans.

The general rule to avoid bad debt is: “If you can’t afford it, and you don’t need it. Don’t buy it.”

Now that you have a better understanding of bad debt, let’s take a look at good debt:

Good debt is seen as a positive form of debt as it will be beneficial to your long-term wealth. This is the case due to the items acquired through good debt possessing an appreciating nature, and the potential to deliver a long-term income. Examples of good debt include student loans, mortgage loans or vehicle finance loans. 

A vehicle finance loan is an example of good debt, especially if the vehicle in question is used for business purposes. Although vehicles do have a depreciating value, they may be essential for your day-to-day life. It is in the best interest of the buyer to pay as much as possible in the form of an up-front deposit, as this could reduce the interest charge, and potentially allow the vehicle to be paid off over a shorter period of time.

If you need any assistance with your current financial situation please visit www.oldmutualfinance.co.za, or visit your nearest Old Mutual branch and speak to one of our friendly consultants.


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