Debt can be helpful, and it can also harm us.
Debt will weigh you down and keep you stuck if you don’t get a handle on it, and pay it off.
Debts can be money owed to other people like family or friends, or money borrowed from a credit provider / financial institution.
Debt can be created to buy big things like a house or a car, or even to pay for food or electricity.
Debt can also be used strategically to move yourself forward in life. Eg taking a business loan today start a business to generate income for yourself.
Different Types of Debt
Not all debt is going to harm us or hold us back, however we need to be able to determine what debt is going to be helpful, and what debt is unnecessary.
“Good” debt is the kind that helps you buy a more expensive thing like a house and sometimes a car, as it allows you to pay off this more costly item over a long period of time whilst you get to enjoy it – even though you don’t yet own it.
Good debt can also be the kind that helps you start a business that will generate an income for yourself in the future.
Important to note is that until you’ve paid the bank or lender back, you do not own the thing that you owe money on.
Although car finance can be good debt as it helps you pay off a car that transports you safely to work and home, and sometimes is even needed to do your job, it becomes “bad” debt when you buy a car that is more expensive than you can really afford.
There are some “golden rules” when it comes to debt. We’ve listed them below.
Car buying tips:
Pay as big a deposit as you can, at least 10%.
Pay the car off over as few months as you can. If you can’t pay the monthly instalments unless you take the longest period of time, then you can’t afford the car.
Never take the option of a residual or balloon payment. If this is the only way you can pay the monthly instalments, then you can’t afford the car.
Be careful of any “get car now and only start paying in x months” offer as it will likely cost you more in interest.
Never buy a car on a personal loan, credit card or overdraft.
House buying tips:
Pay as big a deposit as you can, at least 10%.
Pay it off over as few years as you can. Aim for 20 years or less.
If you qualify for a bond of R1 million, buy a house for less than that. You don’t have to take the biggest amount of debt the bank wants to give you.
Credit Card tips:
Don’t get one, and if you do, get it for emergency’s only.
Only spend what you can pay at the end of the month and pay the full amount monthly.
Where there is a rewards programme that earns you benefits, then transfer money to it and use it like a debit card.
Other kinds of debt tips:
Watch out for bad debt like store accounts or personal loans or credit cards.
Never buy food on a store account.
Be weary of personal loans and credit cards as these often have the highest interest rates.
If you find yourself needing to use any of these kinds of debt, make sure to pay them off as quickly as you can.
Always pay more than the minimum amount asked by the lender as in some cases the minimum amount will never pay the debt off, especially if you have revolving debt. Revolving debt is where the debt and how much you owe is recalculated monthly. This means that you could end up paying a smaller amount each month, but never paying the debt off entirely.
The bottom line is that debt can be a helpful bridge. However, it can also become a burden if misused or you push the limits of what you can afford. If you’re in debt, prioritise paying it off by making sure that you include repayments (of more than the minimum required) in your Spending Plan.
Click on “Strategies to Pay Down Debt” to learn more about two different methods of paying down your debt.
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Debt can be helpful, and it can also harm us.
Debt will weigh you down and keep you stuck if you don’t get a handle on it, and pay it off.
Debts can be money owed to other people like family or friends, or money borrowed from a credit provider / financial institution.
Debt can be created to buy big things like a house or a car, or even to pay for food or electricity.
Debt can also be used strategically to move yourself forward in life. Eg taking a business loan today start a business to generate income for yourself.