Do you know the difference between good debt and bad debt?

01/01/0001

Remember that when it comes to applying for a loan, say for a home or a new car, having no credit record could actually count against you. Debt-free living may seem like the financially responsible approach, however with proper debt management, good debt could actually help improve your life, create wealth and improve your credit score.

Remember that when it comes to applying for a personal loan, a home loan or vehicle finance, having no credit record could actually count against you. This is where the concept of good debt vs bad debt comes into play.

Good debt helps you grow

So, what is good debt? Good debt is an investment in your financial future. It helps to create a firm foundation and possibly improves your future earning potential. If you’re about to take out a loan or go into debt, ask yourself these questions first:

  • Is this the most affordable loan/option available to me?
  • What is the interest rate? (Lowest interest rates are not always the best option – sometimes a low interest rate comes with high charges, so do your research first.)
  • What are the repayment terms? Can I really afford it?
  • What are the charges?

Some examples of good debt are home loans, student loans and business loans. However, there are no guarantees and you should always be cautious when going into debt, especially in South Africa’s current economic climate. For example, paying off your student loan might be difficult if you’re unable to secure full-time employment.

 

 

Bad debt weighs you down

Bad debt is often associated with impulse purchases. Buying day-to-day items such as foods and disposable product, or paying everyday bills, can very quickly lead to bad debt. Some examples of bad debt are:

  • Using your credit to purchase luxury items that you can’t really afford.
  • Taking out one-month loans from unregulated institutions to finance an immediate need.
  • Buying clothes and other items on clothing store accounts (which usually have very high interest rates).

 

Grey areas

Too much debt, whether it’s “good” or “bad”, can quickly add up. If not managed properly, even good debt can become bad debt and may even lead to forced debt counselling. Below are a few grey areas:

  • Credit cards can be used to finance large expenses and can be very useful, provided that you pay off the balance each month. However, credit cards often come with a high interest rate and you could be in trouble if you let it build up. If you think a credit card could help you move forward financially, click here  to find out more about the African Bank credit card.

Learn how to manage your credit card better with the tips in this blog post: How to use your credit card wisely

  • Vehicle finance can be good or bad debt. If you need a car to help you earn income and you can manage the monthly repayments, as well as associated costs like insurance and petrol, vehicle finance would be good debt. However, a new car loses value as soon as you drive it off the lot, so consider buying a demo model or a used car. Whatever you decide, make sure it can fit into your monthly budget.
  • Borrowing money to get out of debt is not usually advisable. However, debt consolidation loans offer a simpler way to manage your money when your goal is to regain financial stability. One of the biggest benefits is that instead of dealing with several creditors - all with their own terms, monthly fees and interest rates – debt consolidation bundles all these payments into one affordable monthly repayment, often lowering the total cost of credit to the consumer. Click here  to find out more about an African Bank Consolidation Loan.

 

Up Next

How to save money monthly
Many people are unsure of the best way to save money. As a result they’re not saving smartly, or not saving at all. Follow this guide on how to save money monthly.

Publish Date: 07/03/2019
Read more
Budgeting is as easy as 50/20/30
While most people know that a budget is necessary, many simply don’t know how to put one together. We’re here to tell you, drawing up a budget isn’t as confusing as you think it is.

Publish Date: 01/12/2017
Read more
Investing in women: An African Bank priority
Many women are now the main breadwinners in their families and form the support structures of their communities.

Publish Date: 01/12/2017
Read more
Three types of credit card fraud – and how to protect yourself
Read this blog post to familiarize yourself with these scams and know how to protect yourself.

Publish Date: 17/04/2018
Read more
Know your rights when applying for a loan
With times being so tough for many consumers, applying for a loan could give you the means to change your circumstances.

Publish Date: 17/04/2018
Read more

About African Bank

Our mission is to be a successful Retail Bank offering a wide range of products and services to the consumers of South Africa. The people who work for African Bank represent the diverse population of South Africa; therefore we are a reflection of you, of all South Africans. We seek to provide value - more than our consumers expect of us. We promise to live our purpose 'humanity through banking' in all that we do and we are confident that we can, because 'We are You'.