Utang is a topic that we don’t discuss openly. It is also often a modest but imprudent excuse for most people when the conversation turns to money. “Hindi ako mayaman. Marami nga akong utang."
Most people think that having any kind of debt is bad and should be avoided unless absolutely necessary. However, we need to take a closer look at the purpose of debt. While some debts do not bring value to your life and add the burden of mounting interest, other kinds can be used to bring in additional income or capital.
Knowing the purpose of the debt will help you differentiate the good, the bad, and for some, the ugly.
These are some activities and facilities where you can incur debt:
- Credit card: Credit cards are used to pay for things without having to carry around a large amount of
- Business loan: Entrepreneurs need money to start businesses. Some fund their fledgling companies out of their own pockets or through loans from friends and family. But as the business grows, more money is needed. Business loans are used to buy equipment and materials, to hire people, to pay for utilities, rentals, and other recurring expenses needed to keep the lights on.
- Education loan: Education is an investment in itself, and children who get a proper education tend to grow into adults who do well at work and in life. Of course, you can also pay for your own further studies to move up the corporate ladder. Education loans are money for tuition that you can borrow now and pay later at an agreed interest and installment terms.
- Home loan: A home can be a long-term shelter for your It is also an asset that can be sold or rented out to generate income.
- Car loan: A car’s value rests in your convenience and time saved in reaching your Owning a vehicle can also provide more utility for your business.
Bad debt
If you are unable to pay back borrowed money on time, then you have bad debt. This could harm your financial standing because you must pay the principal (the original amount you borrowed) and the interest (the lending fee or charge). Missing payments can make the penalties overlap and increase, so your debt gets even worse.
Debt is considered bad if:
- It tempts you to spend beyond your budget.
- It starts taking from your savings or emergency fund.
- You are unable to pay regularly and in full, or you avoid paying it.
- You start borrowing more money to pay off other loans and have difficulty tracking how much debt has built
- The terms of the debt or loan exceed the value or usability of the asset (like when you will be using the car for three years but your loan term is five years).
Good debts
Debts incurred through loans are considered good if you’re aware why you are getting them, and they don’t lead to financial ruin.
Debt can called good if:
- It is used to get products or services that generate income beyond the debt or loan value.
- It can be paid regularly, in full, and on time (like credit cards).
- It is used to augment your net income (like an education loan).
- It allows you to upgrade your lifestyle (like home and car loans).
It helps build your financial discipline and long-term goals (like investments and life insurance).
