Tips for Recognizing Good Debt vs. Bad Debt

Though having a debt-free lifestyle may seem preferable, there are times when taking out a loan might be a smart move if it would help you amass more assets.

For the typical Filipino, debt is now just a part of life. In fact, in the Philippines, there is a taboo around the subject of utang. When the subject of finances is discussed, it's a common justification that most people make, despite its lack of credibility.

Due to this, people have a general aversion to taking on debt because of the widespread belief that all debts are bad. But the point of debt has to be examined more closely. Some debts are not worth taking on since they do not improve your quality of life, while other debts may help you get by until you can save up more money.

Knowing the purpose can help determine whether the debt is beneficial or harmful.

Recognizing the Differences Between Good and Bad Debt

Some types of debt will be evaluated more positively by lenders reviewing your credit record. Focusing on debt relief requires an initial assessment of your financial situation to determine which debts should be prioritized for repayment and which should be written off. In this approach, you may first focus on paying off the worst debts.

What is a Bad Debt?

Losing money due to debt is never good. Expenditure debts are loans incurred to purchase non-productive assets that depreciate over time. High-interest rates are a common feature of many types of debt.

Any debt you cannot pay off or profit from is bad debt. While avoiding debt is impossible, knowing the most prevalent forms can help you weigh the pros and cons.

Below are some examples of debt that can turn bad if not managed effectively:

Payday loans

One of the most well-publicized forms of bad debt is payday loans. Short-term unsecured loans have a negative reputation since their interest rates are very high, often exceeding 400% of high interest loans.

These high-interest rates are meant to promote early loan repayment by working in tandem with several services and late charge assessments. When payments are missed, interest and fees continue to accrue, and it may be tough to get a handle on your debt again.

Payday loans should be used only as a last resort. There are other options apart than payday loans to look into if you are short on cash.

Credit card debt

Credit card debt is among the most widespread forms of unpaid debt. Lenders provide the ability to make purchases on credit via credit cards. The costs associated with these may rapidly balloon due to the high-interest credit card rates, sometimes over 20%. So make sure your credit card balances with your gross monthly income before applying for one to avoid too much debt.

However, having access to credit is not inherently negative. When starting from scratch, a credit card may be a fast and easy method to establish a credit history. With self-control as well as smart use and repayments, your credit card may be one of your most powerful financial weapons.

Loan shark deals

The dangers of loan sharks should be obvious to anybody needing financial aid. People you know personally or via your professional or social network may be willing to give you money without doing any kind of verification or credit check. Loans may have a similar short-term repayment schedule as payday loans. Also, the interest payments rate you're offered can be far higher than the law allows. Dealing with these creditors is often illegal.

Transactions like this, usually unlawful and costly, are not worth the trouble they cause. Cash advance loans are a last resort, but loan sharks should be avoided at all costs.

Auto loans

Although a vehicle may seem like a good investment, to borrow money for an auto loan is generally not a good idea. It's important to know when it's the right moment to sell or trade in your car since its value declines over time.

What is a Good Debt?

A beneficial kind of debt is one that serves to expand one's financial resources. Although you will still have a monthly payment to account for, "good debt" is ultimately beneficial. It's a good long-term investment since its value rises.

Student loan debt

One typical kind of beneficial debt is using student loans to fund higher education. The price of higher education has increased, but those who complete their degrees are better positioned to get better employment with more significant salaries.

Paying back these debts promptly will prevent them from going bad. The more your payments, the less likely you will fall behind.

Business loan

A further investment in your future is starting a business. Investing in your own business is a positive debt if it enhances your revenue.

Although the expenses of a business's inception might be substantial, you can pay your business loans in due time if you are frugal and have a head for business. With time, effort, and good fortune, your small business can have the potential to become one of your most valuable possessions.

Mortgage loans and real estate investments

It's OK to take on a mortgage or personal loans to fund a house and lot Philippines purchase. In addition to providing shelter and maybe increasing in value over time, an investment in an affordable house and lot can also be an excellent financial investment.

Mortgage interest rates tend to be more affordable than those of other types of long-term loans and are often deductible. The interest you've paid may be deemed repaid if the value of your house rises over time, just like what we have in Lumina Homes communities.

Constructed in strategic locations all over the country, our affordable house and lot for sale gives its residents premium convenience and accessibility to major infrastructures, facilities, commercial and transportation hubs, tourist spots, local markets and supermalls, as well as schools and universities.

With Lumina Homes, we also assist you in processing your chosen flexible payment scheme, whether, bank financing or in-house financing, to give you the best homebuying experience.

While most people today have some kind of debt, it's vital to remember that not all loans are identical. Debt may be dangerous if used carelessly, but it can also be a powerful tool for developing wealth if handled correctly.

So, ensure to have a sound financial health when making decisions and shift your loans or monthly payments into good debt. The first step is to choose actions that will benefit you in the long run. When taking on debt, it's important to weigh the costs and advantages of the transaction.

Turn your debts into a lucrative investment with Lumina Homes and make your home reservations now!