What is good debt and bad debt?

We may need a loan for a variety of reasons, during our lifetime. Some of us might need to take a loan out of sheer necessity, or to invest in our future, while others may want to get the extra money to simply improve their lifestyle. So, can debt or loans be classified as good or bad?

A debt is good if it helps build an asset or capability which earns you a rate of return, higher than the interest you’re paying. And a bad debt is the type of loan that will drain your wealth.

Here are some examples of debt that can impact your long-term financial position in a positive way.

Mortgage

Real estate is likely to appreciate in value in the long run, and as you pay off your mortgage, you’re building your equity in the property. But since buying real estate is an expensive proposition, be sure to take on a liability that you can see yourself comfortably paying off in the future.

As a mortgage buyer, it’s important to stay away from speculation and the lure of making a quick profit on a property deal. In a market downturn, your property value may deteriorate, and you may get stuck with a financial liability you can’t afford to pay off. The UAE Central Bank had also introduced new mortgage regulations in late 2013 to tighten lending norms across the banking industry to curb speculation and property-flipping.

There are 72 different UAE home loans listed on Souqalmal.com, which can be filtered based on down payment, loan duration and minimum salary requirements. You can also narrow down results if you’re specifically looking for a Shariah-compliant loan or a loan for self-employed individuals or non-listed companies’ employees.

Education loan

When you take an education loan, you’re investing in yourself or your children’s future, depending on who the loan is for. An education loan provides you with the money to help build an intellectual asset. Investment in education today will translate into higher earning potential and better employment opportunities in the future.

Business finance

If you have a realistic business plan and the right set of skills to succeed, taking a business loan and putting it to good use, could translate into a big pay-off in the future. By taking a secured or unsecured business loan, working capital finance or business equipment finance, you’re essentially building an asset or a capability for your business. Injecting money at the right time in a growing business could make all the difference between success and failure. Souqalmal.com offers SMEs the option to choose from 27 unsecured and secured business loans and 16 equipment finance loans in the UAE.

You can browse through a range of home loans, personal loans, car loans and business loans in the UAE, to find the right one for yourself.

And now, here are some examples of certain types of loans that’ll only weigh you down.

Credit card debt

Credit card debt is the worst and most expensive form of debt with exorbitant interest rates ranging from 25-35% per annum. That said, there are so many smart ways of making the most of your credit card’s features and rewards without racking up the debt. Just make sure that you pay the outstanding balance by the due date.

With high interest rates, the longer you wait, the higher the debt gets, and the more difficult it gets to pay off the outstanding balance. So it’s best to not get into this cycle of debt which will only hurt you financially in the long run.

Personal loans for a lifestyle upgrade

You should only resort to taking a personal loan if you absolutely do need it. Taking a personal loan to fund frivolous expenditures is a bad idea. So if there’s something you genuinely cannot afford, it would be smart to compromise a little rather than take on debt to pay for it.

If going for an extravagant holiday means struggling for the next few years paying off a high-interest loan, then consider avoiding it. Instead travel to a low-cost destination or opt for a staycation right here in the UAE. Your dream holiday can wait till you’ve saved up enough for it.

If you’re considering taking a personal loan in the UAE, make sure you compare all the deals in the market before choosing one. You can browse through 94 personal loan products on Souqalmal.com before picking out the one that meets your requirements.

Car loan for an expensive new car

A car is a depreciating asset, and a new car may typically lose almost 20% of its value the moment it leaves the showroom. And when you take a car loan to pay for it, you’re paying interest too, which basically means you’re losing money in two directions.

Consider re-evaluating how much you want to spend on a car. You could think about getting a used car if you’re after something particularly expensive. If you’re only interested in buying a new one, then a good time to do so is during Ramadan, when there are some lucrative deals being offered by car dealers and banks like ‘finance at 0% interest’ and a range of freebies. Souqalmal.com gives you the option to choose from 78 different car loans, and also keeps you abreast of the latest car deals and car loan offers in the UAE.