Good Debt vs Bad Debt


Debt is a negative word. Every time I hear the word from someone, my head starts to get heavy and aching. I dread the word. Baffling. Pesky. Nauseous.

Imagine what I would feel when something pops out in my head saying, "Don't ever take anything on credit! For God's sake, you will suffer for the rest of your life!" Scary, right? Yeah that was mom's voice. She's right. And she's wrong.

I really love the short but concise answer, "It depends." Almost every doubt can be answered with this line. Examples: "Investing is risky" - It depends.

You can be passive or aggressive in investing; "Nothing beats the iPhone" - It depends. Not all the features of iPhone are superb; "Calculus is the hardest subject ever!" - It depends. Some may find it easy and enjoyable.

You see, it is but relative on the person. Because not all things are created equal, we have a different perspective on every subject depending on our experience and personality.

Mind-crippling as it is, my fear of debt was mitigated. It is when my high school friend shared an interesting story about how he got a 20-door apartment with no money at all! He purchased the property all on credit! So here's how it goes.

My friend lived in an apartment in Makati, Philippines. He's working on a multinational company. He's earning very well then. The landlady of the apartment where he was staying was kinda old.

Every time she collected the rent, my friend felt pity to her considering that she's 74 years old. "It seemed like she found it complicated managing her property at her age", my friend said.

"So I thought, why not offer to purchase her property so that she could retire and receive lump sum of money directly?", he continued. Days later, he made an offer to the landlady. Fortunately, his offer got accepted! Unfortunately, he had no cash! The property costs around 7 Million Pesos!

"What? I need to have a 7 Million Peso loan?", he exclaimed. So what he did is he searched around banks to finance the deal. Php 7 Million loan is not a joke. There are vital factors to consider in a loan.

Until finally, he had chosen a not-so-famous bank for a reason - it had the lowest interest rate. Luckily, he was approved for the loan (he has the capacity to pay considering his huge salary).

But before he pushed the deal, he did the math to check if he could make (or break) money out of the deal. "It was a no-brainer investment", he bragged. "How did you know that it was going to be profitable?", I asked perplexed.

"When my amortization with the bank is LESSER than my monthly rental income!", he proudly said. I was blown away. From there on, the way I look at debt has changed. I realized the value of leverage. Taking advantage.

So what is a Good Debt then? A debt is only good when you're making money out of it. When you invest the money you got from credit and it grows little by little (or exponentially), then that is a Good Debt!

Whereas, a debt is considered bad when nothing gets back to you in return. When you made a loan to buy for a car that you've been dreaming to have, that is really really bad. Consider this, the loan you acquired to purchase a car will never be recovered again. Instead, you'll be paying the loan per period basis from your income.

Now that means your expenses are elevated due to additional expenses - loan amortization, gas, car maintenance, repairs and maintenance. That's a BIG purchase indeed!


Post a Comment
Previous Post Next Post