Find out about the different types of debt that could affect your life.
A large percentage of the South African population is currently in debt and what is not always fully understood is that debt is not just debt; there are in fact different types of debt.
The two types of debt that you may find yourself in are: good debt, and bad debt.
It is exceptionally important to be able to identify what kind of debt you are getting yourself into when you are purchasing on credit, getting a loan, or planning monthly repayments, as the two different types of debt each have their own benefits or downfalls.
Let’s take a look at the different types of debts and examples of each:
Bad debt is generally a negative form of debt as it is detrimental to your long-term wealth. This is the case due to the nature of the purchased items not generating a long-term income and having a depreciating value.
Bad debt is incurred when you continue to purchase non-essential luxury items on your credit card, even though you are already struggling to make your monthly repayments. Examples of non-essential luxury items may include extravagant buys on smart TVs, gaming consoles, and even taking out pay day cash loans.
The general rule to avoid bad debt is: “If you can’t afford it, and you don’t need it. Don’t buy it.”
Now that you have a better understanding of bad debt, let’s take a look at good debt:Good debt
is seen as a positive form of debt as it will be beneficial to your long-term wealth. This is the case due to the items acquired through good debt possessing an appreciating nature, and the potential to deliver a long-term income. Examples of good debt include mortgage loans, vehicle finance loans or student loans.
As a parent, a student loan is a form of good debt. Student loans typically come with a low interest rate, when compared to other debts, and they offer the student the opportunity to better their education, which may result in them landing a dream job.
If you need any assistance with your current financial situation please visit www.oldmutualfinance.co.za, or visit your nearest Old Mutual branch and speak to one of our friendly consultants.