When most people think about debt, the connotations are rarely positive.
But debt can be a good thing if it is used to create wealth or enhance your existing net worth.
Good debt, like becoming a homeowner, typically moves you forward in life because the value of your home appreciates over time.
FNB Premier CEO Lynette Kloppers shares some of the benefits of using debt.
Investing in property from which you can generate a rental income is one really effective way to create wealth.
Consolidating your debt
“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,” says Kloppers.
Personal cash flow management
If you’re disciplined with your finances, one option available is to use your credit card to manage your monthly budget.
You can take advantage of not incurring interest on your credit card if you settle your outstanding balance within 55 days.
Believe it or not, buying a vehicle can, in certain circumstances, be considered as good debt, as long as it’s a vehicle that appreciates in value or can be used as a way to cut down on commuting costs.
If a vehicle helps you secure better employment prospects, then taking out a loan to buy a car is a good thing.
On the flip side, buying an out-of-the-box luxury car that will put you under financial pressure or cars that are bought using residual finance options are considered bad debt.
Getting a tertiary education is one way of investing in yourself and your future earning potential.
READ MORE: The difference between good and bad debt
“Taking out a student loan in order to graduate and secure a credible job has far more value for you in the long-term,” says Kloppers.
Taking out a loan as seed capital to start a business is another example of good debt, as long as it’s done responsibly, and you take out the amount you need for the bare necessities rather than more than what is required.
“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,” she says.
“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.”