Is there any “Good Debt”? Yes. This allows the financial burden of the debt is fully paid. Borrowing to buy a house, children’s education, develop career skills, or start your own business will allow long-term financial benefits.
“Bad Debt” is when you borrow for something that does not bring any financial benefit society or the goods have a shorter life span of the loan period the goods themselves. This includes loans for holidays, buy clothes, furniture, household goods or food outside.
In the negative case to isolate the related debt, we often assume that debt is a matter which is not beneficial and productive. Of course it is not true because the debt can be used productively by individuals, businesses and even charities.
To better understand, let’s look at the definition of debt that is productive and unproductive:
1. If I borrow money to buy an experience or things that I can not pay, and debt with high interest charges, I was burdened with non-productive debt
2. If I borrow money to acquire an income stream that contributed to the repayment of debt, such as buying a shop lot for rent (on a good tenants, hopefully!), I have been using debt productively.
3. If I borrow money on margin accounts to speculate on a “hot” stock-based sembang-sembang/gossip, I have been involved with the non-productive and dangerous. In conclusion, I will lose money (usually) and still owe.
4. If I borrow money to buy a house, and plan to stay in the house for the foreseeable future, at least I can get “back-capital” over time by increasing the value of my house. In any case, it would have saved me from having to pay rent if not buy a house, with this, I owe productive.
5. If I borrow money to buy a new car, and owe more than 90% of its value, I will continue to be volatile in the use of debt if the car is stolen. Are you aware that in most cases, a car depreciates about 1/5th of its value once the showroom? As insurers, they only pay the market value of your car at the time of loss, lack of responsibility to your own.
6. If I borrow money to start my own business, I can off the interest on my business earnings which I can provide tax savings. I can also use a loan to expand the business and this is productive debt
Loans can be a productive, wealth-generating activities, or it will be the experience as “slave to the lender.” Wise use of debt as a tool for wealth creation, tax-exemption and expand the assets under management. For the uninformed, often they feel that debt is a tool to get something they’re not able to get through savings or patience.
Not all debt of non-productive. Prudent financial management capabilities allow us to explain the rate of interest and repay debt capital. When we apply the same method in the business, the result is the same. Cash flow generated from the proceeds of the loan must be able to develop revenue streams to enable repayment of the credit claim and the original loan.