Debt is not all doom and gloom. Read on to find out more about the good, bad, and ugly sides of debt!

Debt is always going to be there. Many people are in debt at some point in their lives. Some might borrow money to fund their educations; others might get into it to purchase their first home or deal with an emergency.

Debt is a necessary evil that has become a perfectly normal and acceptable part of the modern world in which we live. And debt, just like everything in life, has its good and bad sides. Good sides? Yes, there are some debts that can actually provide opportunities to improve your financial future!

But in order to avoid financial downfall, it’s crucial to know the differences between good and bad debt and how to make it works to your advantage.

What’s Considered Good Debt?

Good debt can be seen as a form of valued investment as it will help you to generate income, increase your earning capacity, and build your net worth. Debt that you are able to make timely payments on it based on the loan agreement can be considered as good debt as well because your favourable payment history is reflected in your credit scores which in turn helps you to build a solid credit history.

Some Examples of Good Debt May Include:

1. Your Home or Investment Property Mortgage

Mortgage undoubtedly is the king of all debt. Property has been consistently rated as the best long-term investment- well ahead of gold, stocks and mutual funds, savings accounts, and bonds. You can leverage your property to increase your net worth as the value of the home can appreciate over time, which increases the return on your investment if you ever sell it for at a profit. On the other hand, you can rent out your investment property to cover the mortgage repayment at the same time earning additional passive income.

2. Education

Education is the best investment one can make as it put them on a path towards employment and empowerment. The more education an individual received, the greater their earning potential, that’s why it’s been called a “Lifelong Currency”. An investment in a university degree or vocational certification can usually pay for itself within a few years of graduation. However, it’s worth noting that not all degrees are created equal, hence it’s advisable to consider short- and long-term prospects for any field of study.

3. Business Loans

“It takes money to make money.” It’s a saying older than our grandparents. Money borrowed to start a business or invest in business expansion falls under the category of good debt because chances of building wealth are much higher when you are the boss though not without its own risks. Many businesses fail to survive their first two years, but if you’re hardworking and knowledgeable in your chosen field coupled with sharp business acumen, your chances of success are sure far greater.

What Is Bad Debt?

In contrast to all those good debts mentioned above, bad debt is like junk food that doesn’t add any financial value to your life, and worse, it can be detrimental to your financial health in the long run. Generally speaking, money borrowed to purchase anything that depreciates in value is considered as bad debt.

Examples of Bad Debt Include:

1. Credit Cards

When it comes to debt, credit card is a true double-edge sword. On one hand, when used properly, credit card may come in handy if you experience a change in income or an emergency or prove your creditworthiness; on the other, it can lead you to financial ruin if you do not pay off your credit card balance in full every month. Those interest rates and fees can add up quite quickly. Monthly fees could end up costing more than the actual charges. According to Bank Negara Malaysia, 47 per cent of Malaysian youths have high credit card debts. Some words of advice here are to use your credit card for needs, not wants and never, ever skip a payment!

2. Clothes and Consumables

These two categories are things that lose value as soon as you buy them. We understand that clothes, food, and furniture are essential items that can contribute to higher quality of living, but borrowing money to purchase them by using a high-interest credit card is not a good way to manage your money, unless of course you are able to pay off the debt immediately. Again, the key here is to focus on your needs, not wants.

3. Car Loans

The car loan is perhaps one of the most common types of loans taken by Malaysians after the mortgage loan as most consider the car as a necessity here. However, they are regarded as bad debt because their value depreciates as soon as you drive a car off the lot and as a form of consumer loan, most car loans have fairly high-interest rates. Any loan with a high rate means that you’ll be investing much of your monthly payment into interest. If you’re on the lookout for a new car, buying a used car over a new one is best. Or better yet, make use of the ridesharing services such as Grab, Mycar or Dacsee. Better for the environment, kinder to your pocket.

Borrow Smart to Get Ahead

As we mentioned at the beginning of this article, everyone has to deal with debt at some point their life, what makes a difference is how you manage your debt to prevent the good debts turning into bad debts.

Before taking on any debt, carefully weigh your borrowing needs, consider your repayment ability and set out a workable repayment schedule, then borrowing responsibly to help you achieve your life goals. Additionally, make sure you never burden yourself with too much debt, even if they are good ones, as they will hurt your financial health in the long term.

Last But Not Least, Ask for Help

If you ever find yourself spinning in the spiral of debt and the weight of it is affecting you emotionally and mentally, it’s time to seek for professional help.

Contact Bank Negara Malaysia’s Credit Counselling and Debt Management Agency (AKPK) for FREE debt-restructuring counselling.

If you’re still unsure of how to move forward with your finances, our Avex Credit team is here to help guide you. Contact Us to schedule time with a financial advisor today. We will take the time to understand your finances and help you to make the most advantageous decisions for you.

Avex Credit is a licensed money lender in Malaysia under the purview of Ministry of Housing and Local Government, and governed through Money Lenders Act 1951 and Money Lenders Act (Amended) 2003. We provide a variety of personal and business loans that are tailored to meet your specific needs.