Friday, October 7, 2016

Money for Life: Good Debt vs. Bad Debt

What is DEBT?

According to Aya Laraya, Sun Life personal finance consultant, defines it simply as "using other people’s money." It may sound simple but, in reality, debts we often engage into can pull us down to deep financial burden if we fail to pay them back when they're due. 

For a novice business practitioner, any form of debt is not ideal. However, when it comes to personal and commercial purchases, it seems that many could not resist the temptation of a seemingly very attractive deal or discounts on the latest edition of your favorite smartphone brand in the market, even if the existing one still works perfectly well. That is what you call a “bad debt”.

Mr. Aya Laraya, Sun Life Financial Consultant
However, bad debts may not be all that bad such as in the case of expenses needed for medical emergencies. Unfortunately, in these urgent situations, people are sometimes forced to take out loans with high interest rates just to pay hospital bills. What's frustrating is that many Filipinos suck up to loan sharks just to get quick loans. That is why it is very important to learn about financial tools that could help us prepare, or at least can provide some buffer, for unforeseen expenses like these that may happen in the future.

And while there are bad debts that we should veer away from as much as possible, there are also good debts worth considering. A good example of putting debts to good use are people who have successfully made it big in their chosen industries because they see the positive sides of borrowing money. Good debts are loans that allow the purchase of assets like vehicles or additional capitalization that may improve our business or livelihood. These debts, if used the right way, can actually work in our favor and further increase our wealth. 

But, before we jump to filling up those application loans or pulling credit cards out of our pockets, we need to settle some pressing issues on why we need to borrow money in the first place. We should also entertain the thought of considering other options apart from placing ourselves into debt. If these issues are settled first and you have concluded that borrowing money is the most favorable option, the next step is to establish the right amount of money that you need to borrow.

Not lesser and not more than what is needed can increase your capacity to optimize these financial tools for your benefit. It is also important to create a financial plan on when you can you pay back your debts and the best possible ways to pay them. Know how much you really owe and how much fees and interests are there in your loan that you need to cover.

Beware: the “Zero-Interest” signs for credit card users can be very attractive and tempting. But it pays to know that these credit card companies will never allow you to use their services for free and there is always a financial obligation that comes with it. Always remember that the amount you thought you saved for the zero-interest deal is actually tucked-in with all the necessary fees that comes with the commodity.

If your transaction is done with a financial institution or a bank, learn how to negotiate on comfortable and flexible ways to pay your debt. Most often, banks will find ways on how you can pay off the loan while also maintaining a very good relationship with you as their valued client. Bank officers normally allow loan schemes to be recalibrated and may set additional allowances as long as you can provide post-dated checks as a guarantee of your earnest gesture to pay.

Good debts are often beneficial while bad debts are avoidable. But, whether debts are bad or good, the most important thing to do is to settle them at the soonest possible time. Otherwise, as Mr. Laraya warns, “Debts are immortal and can outlive you.” If that happens, your family members would suffer and nobody wants that to happen.

So pay attention from this day forward how you borrow and spend your money. They will definitely make a big impact on your and your loved ones' futures. 

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