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Debt for Dummies

April 21, 2024
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Paul Roux
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Paul Roux

The Good, the Bad, and the Ugly


Debt is when an institution lends you money, with the expectation that you will pay it back later. But why would anyone want to lend you money?

One would think that borrowing money from the bank puts their money into your pocket, whilst in fact, the opposite is actually true: Borrowing money puts your money into their pocket. Please explain, my Wingman

Allow me to demonstrate:

Lets take a standard vehicle loan of R100,000 at 15% interest over 6 years. After 6 years, the total amount that you paid = R142,740 (excluding maintenance and insurance), whilst the value of the car would likely have decreased to under R50,000 over the period. You pay >R142,740, you get <R50,000. Not exactly the deal of a lifetime, is it?


Good Debt

Whilst debt sucks most of the time, it doesnt always have to. Debt can serve as a useful tool to accelerate your wealth if it is used and managed correctly.

Good debt is debt that is used to invest in something that will increase in value and generate an income over time. Good debt is a way for money to work for you.

  • Property Investment: Taking out a loan to buy a home can be considered good debt because property is likely to increase in value over time. Good debt becomes even better when you have tenants in the property that repay the debt on your behalf.
  • Student loans: Although student loans are not ideal, it provides young people with the opportunity to study at varsity. Education can lead to higher-paying jobs, which in turn will allow you to pay off your debts quicker and build wealth for yourself and your family.

 

Bad Debt

Say it with me: Banks WANT to lend us money so they can profit off of us. Not all debts are bad, but whatever you do, do not venture into the world of credit cards and personal loans. These debts cost you money and greatly reduce your ability to create wealth.

  • Credit cards / store credit: Acquiring debt to buy non-essential items that you want (and typically can't afford) is bad debt. Interest on credit cards and store credit averages roughly 20% in South Africa. If you really want to buy a new pair of VANS or that cute little Zara sweater, rather save up for a few months and buy it cash.
  • Personal loans: Personal loans are mostly used for large purchases and emergencies. These loans ranges between 18.25% and 26.5%, which will dig you into trouble sooner than you think.

 

Neutral Debt

  • Vehicle loans: Vehicle debt is often seen as "neutral debt" because many people cannot operate without a personal vehicle. The reality, however, is that people tend to spend way too much on cars.

Interest on vehicle debt averages around 15% in South Africa, plus you have to factor in maintenance costs, petrol, and insurance, which makes it even more expensive. Try to put down a large deposit on your car, as this will reduce your monthly repayments significantly.


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