Discussing Good debt versus Bad debt in South Africa
South Africans often don’t understand the implications of taking out bad debts in a high interest rate environment.
During the holidays, many South Africans borrow money to overspend on gifts, parties, and other expenses. This leads to accumulating debt on their credit cards and store cards. These types of debt come with high interest rates and strict repayment terms and leaves many in a difficult financial position when they start off the new year.
Understanding and managing debt is crucial for your financial future. Debt can have an impact on your ability to save, invest, and achieve your financial goals.
They don't call January "Januworry" for no reason. January is a good time to learn about debt and take control of your money and plan for your year ahead.
In order to understand debt and how to manage it, you would need to be able to distinguish between good and bad debt.
What is Good debt
Good debt means borrowing money to invest in things that can grow in value or make money. Examples of good debt include:
- Mortgages: Buying a home is a smart investment because the buyer pays for their own property, which usually increases in value.
- Home improvement loans: Getting a loan to renovate your home and increase its value. You can choose a personal loan or a home equity loan.
- Business / Corporate loans: Borrowing to start or expand a business can help grow personal wealth.
- Vehicle financing: Financing a reliable car is good especially if your income you earn depends on you have reliable transport.
- Student loans: Investing in your education increases earning potential and other long-term career opportunities.
Bad debt
Bad debt refers to debt that does not help in building your wealth or add any long-term value. Examples of bad debt include:
- Credit card debt: Increasing credit card debt for non-essential purchases, and not paying it off in full at month-end.
- Lifestyle loans: Borrowing money for things like gadgets, fashionable clothes, and fancy vacations that don't have long-term worth.
- Financing a rapidly depreciating vehicle: Financing a car that loses value quickly and requires costly repairs is a bad financial choice.
Debt and credit scores
A credit score is also crucial in managing debt, as it lets lenders know if you’re a low-risk or high-risk borrower. Lenders will check these scores and accompanying reports in detail before giving any kind of loan or credit.
Your credit score affects the interest rate you get. Good debt helps, but bad financial behavior makes it hard to get good financing in the future.
Using credit is necessary; getting a loan or bond can greatly impact your way of life. Getting a loan with a good interest rate can save you a lot of money. This is especially true over the course of the loan repayment period. The savings can amount to thousands of rands.
TOP TIP: for applying for new debt: Make sure you always maintain your tax compliance and financial records as the bank will be asking for these. Contact Zeelie Professional Accountants SA for assistance.
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