Not all debts are bad. Some debts are good because they can augment your existing income or capital. These type of debts are in the form of:

• Business loan
• Education loan
• Home and a car loan
• Credit Cards

But debts become bad when you fail to pay them on time and in full.

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Utang is the topic that we don’t discuss openly. It is also often a modest but imprudent excuse for most people when the conversation turns to money. “Hindi ako mayaman. Marami nga akong utang. (I’m not rich. I have lots of debt.)”

Most people generally think that all debts are bad, which results in a collective fear of having them. However, we need to take a closer look at the purpose of debt. While some debts do not add value to your lifestyle–and may even add the burden of mounting interest–there are other types of debt that may be used to extend your financial capability in the form of additional income or capital. Thus knowing the purpose will help you differentiate the good, the bad, and for some, the ugly.

These are some activities and facilities where you’re introduced to debt:

• Credit card: Credit cards are used to pay for purchases or services without having to carry around a large amount of cash.
• Business loan: Entrepreneurs need money to start businesses. Some choose to fund their fledgling companies out of their own pockets or through loans from friends and family. But as the business grows, more money is needed. This loan is used to buy equipment and materials, to hire people, to pay for utilities, rentals, and other recurring expenses needed to keep the lights on.
• Education loan: Education is an investment in itself, and children who get a proper education tend to grow into adults who do well at work and in life. Education loans are money that you can borrow now and pay later at an agreed interest and installment terms.
• Home loan: A home has the fundamental value as long-term shelter for your family. It is also an asset that can be sold or rented out to generate income.
• Car loan: A car’s value rests in the convenience and comfort in reaching your destination. Owning a vehicle can also provide more utility for your business.

See this related article: 5 rules on managing debts wisely

Bad debt

If you are unable to pay back borrowed money on time, then you have bad debt. This could harm your financial standing as you must pay the principal (the original amount you borrowed) and the interest (the fee or charge imposed by the lender as part of your borrowing). Missing payments also result in overlapping increase in penalties, which further worsens the debt.

Debt is considered bad if:

• It tempts you to spend beyond your budget.
• It starts taking from savings or money that was set aside as an emergency fund.
• You are unable to pay regularly and in full, or you avoid paying it.
• You start borrowing more money to pay off other loans and have difficulty tracking how much debt has built up.
• The terms of the debt or loan exceed the value or usability of the asset (e.g. if you’ve only been able to use a car for three years when your loan term is five).

Good debts

Debts incurred through loans are considered good debt if you’re aware why you are getting one, and it doesn’t lead to financial ruin.

Good debts can also be defined as:

• Products or services paid to generate income beyond the debt or loan value.
• Can be paid regularly, in full, and on time (e.g. credit card service)
• A loan that augments your net income for an agreed period of time and interest (e.g. education loan)
• A loan that allows you to upgrade your lifestyle (e.g home and car loans).
• A loan that helps build your financial discipline and long-term goals (e.g. investments and life insurance).

For more information on Metrobank Credit Card, visit https://www.metrobankcard.com/

For additional information on how to avail of car or a home loans, you can head to the following sites: https://metrobank.com.ph/upgrade/home-loan for home loan and https://metrobank.com.ph/upgrade/car-loan for car loans.

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This article is part of a collection of stories and practical financial tips that are published with the goal to help people learn from the experiences of others, and to pick out lessons on personal finance and sound money habits beyond the pandemic.