There has always been a great debate on debt and there’s even a popular view on what makes good debts and bad debts.
Personally, I don’t think of debt as good vs. bad. Rather, I look at it as BAD vs WORSE. Today’s society has accepted the fact that debt is part of our lives and there is no way to live without it. For many years, I subscribed to that popular belief and looked at debt as a means to reach my aspirations. However, debt is something we can actually do without, or at least minimize. The biggest regrets in my adult life were mostly about getting in debt, and if there will be a ‘do-over’ in life, I would live one without it.
Not-so-BAD debts
There are some debts that are not as bad as the others and, as a financial planner, these debts are something that we can live with, although it is something we should get out of as soon as we can. Such debts are home amortization and certain business debts like credit lines from suppliers.
Everyone deserves a home and buying it in cash is quite difficult for most of us so I am making an exception for home loans. However, if you should get a housing loan, I recommend that you maximize your equity (downpayment) so you can reduce your interest expense. The interest paid in home loans, though lower than most other loans, can be substantial since mortgages are spread over many years. I once heard from someone that he will only get a home loan when he already has a minimum of 50 percent equity—that guy understands his mathematics.
For business owners, some credit terms from suppliers are all right provided the interest levied is not horrific. While many suppliers do not add interest charges in their credit terms, one can ascertain the cost of borrowing by offering to pay in cash and asking for a discount. This discount, in essence, is the interest being paid for the credit term. Some businessmen have so much trade payables that they are dangerously standing on thin ice — being over-leveraged is a recipe for disaster. A sudden business change can cause bankruptcy.
Fate worse than debt
As to worse debts, they are our usual fare of consumer loans led by the monster of all liabilities: credit card followed by personal loans. Why? Because they charge such onerous interest rates. The worst thing you can do is pay the minimum in your credit card balances. Once you do, it will take decades to repay your debt. Informal loans, especially those offered by loan sharks, are beyond worse as the interest you pay can reach 200 to 300 percent a year.
Some debts are ok such as home and business loans – they can actually help you build assets. There’s also nothing wrong with credit cards, in fact they can be very convenient. However, borrowing through credit cards is really unwise in my book.
My friend Chinkee Tan once told me that while slavery was the bondage of yesteryears, today’s slavery is debt. Being in debt deprives us from being totally free as we are beholden to our obligations. And while debt is not a sin, even the Bible has nothing positive to say about it, referring to it as foolish. People may find my view on debt idealistic, even naïve, but whenever I see debt-free people, I can tell you they are happier. Personally, I can’t wait for the time that I will be debt-free, and as the Lord permits, it should be soon.
No longer will I believe the lie that debt is necessary and not bad. “Owe nothing to anyone, except for your obligation to love one another. If you love your neighbor, you will fulfill the requirements of God’s law.” –Romans 13:8, NLT.
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