Good Debt vs Bad Debt

My view on debts and understanding the difference between good debts vs bad debts.

Posted by Uncle Bob, 15 Nov 2017


We have always heard the financial gurus talk about good debt vs. bad debt.  Simplistically, a debt is considered good if it is used for sensible investments for future gains.  It is considered bad if it is for expenditure that reduces your wealth.  In the western or developed world, some of the financial advisors have classified certain debts based on the table below.

  Good Debt Bad Debt  
  Property Loan Credit Card  
  Student Loan Car Loan  
  Business Loan Holiday Loan  
  Car Loan    

Let’s go through each point.

Property Loan
I’m sure no one will dispute that a loan to buy a property is considered good debt.  This is because properties tend to appreciate in value and worth more in the future.  By owning a property, a person no longer needs to pay rent which is something that has zero value immediately after the payment is made and is always associated with the saying “pouring money down the drain”, so saving on rental is always a positive.

Student Loan

Although in the western or developed world, they tend to place student loan as good debt, I would beg to disagree in the context of our Asian society.  I’d like to argue that because of our cultural difference and the way we bring up and treat our children.  In the western culture, you are essentially on your own the moment you turn 18.  This means you pay for your own education if you want to increase your value in the workforce.  However, in the Asian culture, the parents have the responsibility to provide for the children and their education till such time they are able to stand on their own two feet. Thus, the children should not have to shoulder the burden of their own education.
What if the parents do not have sufficient money you say?  Well, I do understand the cost of living is getting unbearable these days, however, the parents have years in advance to plan and save for the education.  Just by simply putting away RM200 a month from the moment the child is born will result in a savings RM43,200 by the time the child turns 18.  That is not adding in basic interests from savings (total savings become more than RM52,000 if you just add an interest rate of 2% over the period of time) or fixed deposit account or the potentially higher returns from unit trusts or education insurance schemes.

Business Loan
Business loan is generally a good debt as the money is put to good use to grow your wealth.  However, caution should be taken against getting involved in get-rich-quick schemes or not having a sound business plan.

Car Loan
Some of you may have noticed that car loan appears both as good debt and bad debt.  You may be thinking it was a mistake or I’m off my rocker.  Well not really.  If you buy a car because it is necessary to perform your duty or to conduct your business, then it is a good debt because the car helps you to earn money or grow your wealth.  If however, you are taking a loan to buy a high end car to as they say “keep up with the Joneses” then that is bad debt.

Credit Card Loans

Credit card loans occur when you purchase something and do not pay in full or you perform a cash advance using the credit card.  Neither case is good.  For the first case, you are basically buying beyond your means and should consider cutting down on your spending.  For the second case, it is never a good idea to use credit card cash advance as the interest rates are high compared to any other loan.

Holiday loans
What is there to say?  If you need to take a loan to go on a holiday then don’t go!  Either postpone the trip until you have saved enough or take a less costly holiday.  Furthermore, how can anyone enjoy a holiday while having to worry about how to pay off the loan for the holiday? This is my perspective about good debt and bad debt.  I hope it is informative for some of you and opens up your view on debt.

Uncle Bob

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