Should debt be ruled out entirely?

October 20, 2014 | Filed under: This is Money | Author: Hope Ikwe

The idea of debt sends fear down the spine of many people even though many of these people find themselves in one form of debt or the other.

Debts can be categorised as “bad debt” and “good debt”.

Some examples of “good debt” are loan for education, loan for business, loan for real estate or home mortgage and loan for investment.

Are these “good debts” really good in the sense of the word? The borrower has the responsibility to determine the value of these debts as they have a 50-50 chance of success and failure because they involve risk.

Education loan has both its pros and cons as the money borrowed to fund education to improve a person and offer an opportunity to move upward the career ladder.

Same applies to using a loan to acquire technical skills to help you earn more. This however cannot guarantee financial success as good degrees and academic qualifications is not a sure bet that a person will secure a well paying job.

Loan for businesses are a way for empowering people who wish to be self employ and expand existing businesses. If the business succeeds, it means that the borrower has scored a good financial point but if not, then it is one those risks to bear.

Borrowing money for real estate can be on a safer side especially when such home is for rent, the borrower can quickly pay back the loan and begin to earn money from such property while the property appreciates. On the other hand, if it’s a mortgage on a residential home it does not bring any earnings to the owner but only provides shelter for the owner.

Loans can be acquired to invest in shares, stock, bonds and gold. Investments on these instruments can be beneficial in an economy boom and it can also be risky in a dwindling economy. Investment in gold can a safer investment especially when acquiring it on loan even though gold has not been with its down side occasionally.

On the other hand, borrowing to acquire car, clothes, fast food and on credit cards are referred to as “bad debt”. Cars bought on loans yield no profit for its owner as it in facts loses its value immediately leaving the car stand.

Borrowing to buy new and trendy clothes and fast food not out of necessity but want will stick the borrower’s neck in debt while maintaining a credit card will be cumbersome to the holder.

Another “debt trap” to avoid falling into is “robbing peter to pay paul”. Never borrow to pay another debt as it will only mean transfer of debt from one creditor to another.

Hope Ikwe