Some individuals make every effort to avoid debt due to the dangers that come with it, but not all debt is harmful.
Debt has its benefits, too. Financial advisors concur that debt is good debt if it enhances your net worth and bad if it has the opposite effect. Loans for homes, education, and businesses are seen as positive debt because they boost your net worth.
For instance, when you use a home loan to buy a property, your financial situation is improved. The house will become your property once the loan is paid off, at which point you can sell it for more money than you originally paid for it.
Credit cards, overdrafts, payday loans, and auto loans, on the other hand, are seen as bad debt because they reduce your wealth. The majority of these loans are made impulsively, have higher interest rates than the majority of loans, and easily result in excessive debt.
Millennial financial planning expert Bera advises her clients to discuss their desire for a loan with their partners or family members and to wait about a week before making a decision. Sometimes we don’t need a loan, we just need to manage our finances better.
Here are questions to ask yourself and consider before taking out a loan of any size.
- Do I really need a loan?
- Can I repay the loan?
- Is the financial institution trusted and reputable?
- What happens if I can’t repay or I miss my repayment date?
- Is this the best interest rate I can get?
Also see: 6 Ways to reduce your living costs in South Africa in 2023
