07 March 2018 – Despite the negative connotations often associated with debt being bad for consumers, when used responsibly, debt can add significant value by helping consumers manage their financial affairs and progress in life.
Lynette Kloppers, FNB Premier CEO, says the ongoing debate around what makes good or bad debt is as old as the origins of money. Debt can either be classified as being good or bad depending on how you use it, as well as its overall impact on your financial position in the long term.
Kloppers unpacks some of the benefits of using debt wisely:
- Wealth creation – when used to buy an investment property that will later pay for itself through rental income can help consumers build future wealth.
- Debt consolidation – this allows consumers to combine the debts that they have with various credit providers into one convenient loan. They will then get to enjoy lower monthly repayments and gain more control over their finances.
- Personal cash flow management – using short-term debt like a credit card to manage your monthly budget and still be able to pay off the debt interest free, within 55 days, can help you manage your personal cash flow.
- Career growth – for example, if you work in an industry that requires you to constantly be on the road, using vehicle finance to purchase a car could potentially put you at an advantageous position by enabling you to do your job more efficiently and eventually help you to progress in your career.
- Education – taking out a student loan in order to graduate and secure a credible job has far more value for you in the long-term.
- Entrepreneurship – many aspiring entrepreneurs often have to take out a loan in order to fund a solid business idea that has potential to grow with good returns.
When the business finally takes off, the entrepreneur can start paying back the loan with the profits they make, putting the business on a good footing and setting it up for sustainable long-term growth.
“When using credit, it is equally important to carefully consider your needs in order to identify the right type of credit for your particular situation, to avoid paying more on interest in the long run. This is the biggest mistake that consumers make, often leading good debt to be viewed in a negative light,” concludes Kloppers.