While many people turn to loans to fulfill their needs and deal with their financial issues, borrowing money can cause more significant problems. The key to deciding whether
to apply for a loan is to consider several factors such as its purpose and your financial situation.
Why do you need money? How do you plan to pay it off? Based on your current situation, will you be able to settle your debt in time? It’s crucial to ponder these questions to
know whether you’re making the right decision.
The Difference Between a Good and a Bad Loan
Good debt benefits you by increasing your net worth or improving the quality of your life. On the other hand, bad debt is a loan used to make a purchase that depreciates.
GOOD DEBT: Opening Opportunities
Debt can be considered good if its purpose is to enhance certain aspects of your life.
Since learning is a continuous journey, securing a loan for further education is like investing in your future. Taking up a new degree or enhancing your skills will boost
your earning potential and open more opportunities for career growth. Your new and advanced skills could improve your income, making the loan pay for itself eventually.
Moreover, a loan can help finance a family member’s education to pave their way for a brighter future.
Starting your own business is an endeavor that offers opportunities for personal growth and financial freedom; however, it requires cash that not everyone has. In this
case, borrowing money to pursue such a venture is a risk worth taking. Starting a business is challenging, but the returns could be rewarding personally and financially.
Doing necessary home improvements is an effective way to turn your home into a safe and comfortable place to live in. Though it costs money, you can get a loan to give
your house a new look and match it to your lifestyle. This is a wise investment as in enhances your living situation and increases the property’s value. If you’re
planning to sell or rent your place out, doing home improvements will help you attract more potential clients.
BAD DEBT: Getting Nothing In Return
Borrowing money to fulfill your wants that do not appreciate in value and spend beyond your financial capability is considered a bad debt. It does not contribute to your
well-being; instead, it could create even more stress.
Clothes, Gadgets, and Consumables: Clothes are a necessity, but there should be a limit to how much you spend on them. The same goes for gadgets, which depreciate in value
the moment you use them. Using a credit card to go on a shopping spree, eat out at fancy restaurants, or splurge on parties even if your monthly income cannot cover them is a
rabbit hole. The high credit card interest rates could bury you in debt before you know it, so only make such purchases if you have extra cash or if you’re confident that you
can settle your bills on time.
Loans could either be a lifesaver or a disaster in the making. It’s up to you to spot the bad from the good. Just remember only to get loans that won’t force you to spend more
than 35% of your monthly salary to pay them off, and always ask yourself, “what would I gain from this?”