I remember when I am young, my mum always tells me that debts are bad and I must make sure that I don’t owe anyone money. Now that I have grown up, I have learned a lot more about debts and how they can be useful too. I hope that the impression of all debts being bad will be changed by the end of this article as sometimes they can help you make money.
So What Are Debts Actually?
When you owe someone or some party money, basically you are in debt. This is usually arranged through a deal where both parties agree to certain terms whereby you will agree to pay back a certain amount by the end of a date. Debts usually will include interest rates as the lender wants some sort of return for having to take the risk of lending money to you.
If debts are not made properly, then it may end up trapping your finance for a long time. One simple example would be credit card debts if you are someone that does not track your spendings and always overspend to the point where you can’t handle the bill, you will suffer. Late payment for credit card bills can charge between 24-28% which is a LOT of money.
Examples of Debts
Mortgage Loans
Usually, people will take on a mortgage loan to buy their houses because the price of a property can be very expensive. Singaporeans, in particular, takes mortgage loans to buy their HDB flats. They only have to pay 10% of the price using cash or CPF and the rest will be paid using their mortgage loan.
A mortgage would normally help people to acquire property or land and then the person can slowly pay off the loan with interest included.
Credit Card Bills
I am sure all of you are using credit cards and they actually also debts just that they are short-term debts. As you all know, using a credit card is like spending your money in advance. You will pay using credit cards for goods or services and it will be billed at another period.
Credit cards are known to be commonly used as they have awesome deals and rewards to attract users. But I have to say that credit cards can be really bad if you do not know how to control your spending. Be responsible and make sure that you pay your credit card debts on time every single month.
Student Loan
When you are going to study college or university, the school fees can be very high and people would usually apply for student loans to pay for their school fees. Student loans usually have a higher interest rate than mortgage loans.
This is due to the fact that if you are not able to pay for mortgage loans, they can take your house or car to compensate for the loan. But if it’s a student loan, the lender cannot take over your education certificate. This means that the lender is being exposed to more risks as he may lose all his money and this explains the high-interest rates for student loans.
What are Bad Debts?
Bad debts are basically debts that will not give you any benefits monetarily and will continue to take money out of your bank.
Car loans are by far one of the most expensive things to own in Singapore and it is bad debt. Cars will depreciate every year and it has high maintenance costs. Essentially, you are paying for something that only helps your transportation to be a little bit more convenient but you have to commit quite a huge part of your salary into financing a car.
Credit card debts can be bad debts if you do not know how to control your spendings or you cannot pay on time. The interest rates on credit card debts are insane and it can cost you a lot if you fail to pay on time.
Student loans are also another bad debt as it does not allow you to get any revenue out of it. Yes, you might be able to get a decent job using the certificate that you get using the student loan but the amount is about $80,000. Furthermore, there is no way out of the debt, it’s either you pay it or you die. You have to pay it no matter what unless you passed away somehow.
Good Debts
Good debts are debts that will give you monetary benefits and will put money into your pocket.
Credit card debts can be good debt as it gives you many benefits such as discounts, cashback, or even rewards. If you are able to manage your spendings well, credit cards are awesome as they can even help you to build a credit score. This would increase the chances of banks lending you money as you have a good credit score.
Mortgage loans can also be good debt as it may give you a source of income. Imagine if you buy a house using a 10% downpayment and takes out a mortgage to fund the rest. You then rent out rooms at a price of $600. You will be able to manage the debts easily as the rental already covers most of the debt’s monthly repayment.
At Bottom Line
You should take good care of the choices you make in life. Credit cards are like two edge swords, if you take of it, it is a good weapon, if you fail to take care of it, you get stabbed by it. There are instances where debts can be beneficial and not all debts are bad.
Be smart with it and make your debt decisions wisely.
