Most people think of debt as a risk game to play, we all while growing up
have listened to how debt destroyed someone or bad it is.
But is it? The real question to be asked are:
What is Debt? And if the debt is such a bad thing, then why they are
banks and other private organization giving debt away? And why are so
many people taking them?
Our family, aunties, and uncles always say, “Never get into debt! It is bad. Buy only what you need and can afford! Owe no one a dime! Debt will get you in trouble...”.
Today we will look into:
Is debt necessary? Is debt good or bad?
If, I want debt. What debt should I get into?
Also, what kind of debt should I Avoid?
What does Debt stand for?
When a party borrows money from another party, with a promise to pay back.
The party that’s borrowing can be an individual or an institution. While the
party that’s lending can be a privately owned institutions. For instance, to
take a loan or debt, some things are necessary- There should be a contract
or an agreement, there has to be a repayment plan, the amount received
should be paid back in half or in full within an agreed period time. In most
cases, the money that is borrowed has to be paid back with an interest,
decided before the agreement.
A Debt can be SECURED or UNSECURED
Secured Debt means the borrower will deposit an asset as a security before the loan is given. E.g.; House Mortgages, Gold Loans, etc. In case the borrower fails to pay back the money then the lender can sell the asset they pledged to get their money back.
On the other hand, Unsecured Debt is where the borrower doesn’t
pledge any asset. A good example for this would be
credit card debt.
But this doesn’t mean you will be left free if you fail to pay
back.
But before we go ahead.
If you think you are getting any please share and check out our Another post on how to create 9 streams of income by Age 23?
Is Debt Good or bad? Is Debt necessary?
In our opinion, there’s no straight answer to this. If we say Yes or No,
it will only raise further questions? If we say BAD,
then you will ask then why are the countries, banks and richest individuals taking and selling it?
And if I say GOOD,
then you might ask then why there are so many families just end up
paying their debts for the whole of their lives?
So, the best thing to say will be, A DEBT IS BOTH A GOOD THING AND A BAD THING?
If I want Debt. What Debt should I get into?
So, to say you take debt to buy an asset such as property, rental building. As long as the income from the asset you bought is more than the amount you are paying back, it is good debt. In this case, you have borrowed for INVESTMENT.
What kind of Debt should I avoid?
But on the flip side, if you take debt to buy a pieces of luxury like a necklace, designer wares, supercar, or an expensive vacation, simply you have borrowed for something you can’t afford, in this case you have taken a BAD INVESTMENT. And you have got yourself in BAD DEBT, this can also be seen in corporate culture, companies borrow money to finance their expansion and growth, if the debt taken is moderate, the interest is low and the payback period is high enough then the company can survive emergencies.
A company with large amount of debt may not be able to pay it back if the
situation goes adverse like revenue falls or some major global shock like
we say in the last year due to CORONA VIRUS as whole world was in
lockdown. Many companies had to go under as businesses were affected for
months by it.
Another way to see it is that, if a company decides to take no debt, then it might be missing out on major opportunities and this can happen if the organization has no vision for growth and expansion and is happy to operate on small scale for a long time.
MORTGAGE: When you borrow money from a bank or any other financial institution to
pay for a piece of property. Actually, you can make a down payment or a
part of the total amount and take up the rest on the mortgage.
Let’s say, you want to pay for a million-dollar property, you can make
a down payment of $400,000 and the rest $600,000 on the mortgage. $600,000
i.e., 60% of the total amount, will be financed by the bank or FIs to you. Although, you will have to pay interest on this, spreading out over the number of years in the contract maybe 30-40 years. If, you fail to
pay the financial institution will sell your property to get their money
back. In 2017, a debt study made by NERD WALLET, an average American carried an average amount of mortgage of
$174,000.
BUSINESS LOAN: A small business may need to take a loan to grow a company, this
company can be put into commercial adverts, or hiring of new staff, or
renting new places. A company must make a proper review of its market and
its cash flow. For instance, if a company has created a product having
high demand and they have an effective management structure, then this
type of loan will be good for them. All they require is to hire more
workers and expand. But if a company takes these types of debt without a
proper review and planning then they may run into a problem when they can
not pay back the loan. The Rule of thumb is,
Never go into too much debt. It can
choke your cash flow and disrupt the payment structure.
CORPORATE DEBT: A corporate body may consider borrowing money from sources that are not
available to individuals. Two types of Corporate Debts are:
BONDS: This is a type of debt that occurs when a company takes loans and
promises to payback the investors. Investors holding these bonds will get
their money back with a certain amount of interest on your money.
For instance, A company we shall call GreenX, needs to acquire
ultra-modern equipment for increased capacity. The amount required for
these types of purchases is $1 million dollars, then it can issue 1000
bonds of $1000 Face Value each. Investors holding onto these bonds, they
will be paid back on a future date at an agreed rate. When the bonds get
matured. In this case the company is the borrower while the investors
are the lenders.
COMMERCIAL PAPER: This is a short-term corporate debt ranging a short period from several
days to 270 days. Companies use these types of debts to finance a
short-term liability, like payroll payments, etc. But these are not
secured by any collateral making a kind of unsecured debt. Being this the
main reason, its only issued by the companies having high quality debt
ratings. Only a company high such a high rating can easily issue the
papers. These are usually issued at discounts from the face value.
CREDIT CARD DEBT:
Credit Card debt is a form of unsecured loan and its one of the most
common and most expensive in USA. A report showed that American consumers
are carrying more debts on their credit cards, therefore it is becoming
difficult to pay. However, if a credit card is put to a proper use, it
gives you a list of advantages over paying with cash.
To have a healthy credit card rating you must avoid:
1.
BUYING THINGS, YOU CAN NOT AFFORD.
2.
MAXING OUT THE LIMIT.
3.
NOT PAYING YOUR BALANCE MONTHLY.
Doing this you get various benefits like:
1.
REWARDS AND POINTS PROGRAMS.
2.
PURCHASE INSURANCE.
3.
TRAVEL INSURANCE.
If paying off your Credit card debt has become a problem, here is a
list of things you can do:
1.
CONSIDER A DEBT MANAGEMENT PLAN FROM AN ADVISOR.
2.
TRY AND CONSOLIDATE MULTIPLE DEBTS.
3.
TALK TO A BANKRUPTCY ATTORNEY AND DISCOVER YOUR OPTIONS.
CAR LOAN: You might need a car to go to the job that pays you. If you do not have
money for the car, what will you do. You can take a car loan and the payment will be spread in a given time frame. In this case the car that you get is the collateral, if by any chance you fail to pay back the lender can take your car back. Reports show the car loans are becoming longer and expensive, beware of getting trapped in an expensive car loan.
To avoid getting stuck in an expensive car loan, do the following:
1.
DOWNSIZE YOUR DESIRE. GO FOR A LESS EXPENSIVE CAR.
2.
IF A LOAN IS ALREADY TAKEN, TALK TO THE DEALERSHIP AND DOWNSIZE YOUR
CAR.
PERSONAL LOAN:
These are usually 2-5 years period debts. These can be taken to pay off
any credit card debts, or for any personal emergencies and you don’t have
cash. Interest rates on these can range between 5 – 36%. Sometimes, you
might not be able to pay back these loans there are steps you can take to
manage the situation:
1.
Call your lender to extend your debt.
2.
Seek assistance from the NON-PROFIT credit counselor.
3.
Talk to a bankruptcy attorney.
MEDICAL DEBT: A study from Consumer Financial Protection Bureau, in 2017, it
found that most people were contacted by debt collectors the most. Routine visits to your doctors and some other health emergencies can lead to medical bill debt. If you are already in debt from other channels this
will make the situation only worse, but these are few things you can do to
manage this:
1.
SET UP A PAYMENT PLAN.
2.
USE A MEDICAL CREDIT CARD.
3.
HIRE A MEDICAL BILL ADVOCATE.
Well folks that’s all for today, if you want to read more, there few posts below.
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