Why is Bad Debt Really Bad?

Inflation is hitting everybody hard. We get surprised every week on how much our usual grocery budget can go and they don’t go far. We look at the changes in fuel price every single day and we watch painfully of its big rises and tiny falls. We feel bad that our turtle pace salary increment cannot cope up with the speed of the price hikes of most commodities. We get anxious of the lowering value of our savings, stocks, pensions and other assets, even real estates, and the rising interest rates. And for most of us, if not all, the predictive looming recession keeps us awake at night.

This has happened not so long ago and we thought that people have learned from the previous economic downturns. It seems though that this is not the case for some. While it is true that some people find opportunities in these trying times, some cannot hunt for the same opportunities even if we are on the same hunting ground. Although the pandemic has given some individuals to save more (e.g. saving transport expenses due to working remotely), many have increased their purchases during this time as well. Unfortunately, not all purchases are sound and some do struggle through paying especially those which were loaned, thus we consider bad debts.

Let’s define bad debts in its simplest term. Bad debts are types of debts that do not increase our net worth or do not add to future values. Any loans that wrack our nerves and give us nightmares. Any loans or purchases that devaluate easily and make our finances unhealthy. Any loans or purchases that keep our bank account empty and do not allow us to see our paycheck. Anything that makes us look good on the outside but causes us to feel terrible in the inside.

The following are examples of bad debts:

Car Loans.

Yes, that brand new red BMW sports that is the pill to our midlife blues or for a show for some of the younger ones. If we loan it and depend on our paycheck, no matter how large it is, for its repayment, then that is not a sound purchase. A brand new car’s depreciation rate on the first year alone is about 20%, and it keeps losing its value on the succeeding years. That would make us bluer than blue!

Or having to have multiple cars when we can own one only. Covid may have shun us away from using public transport, but buying cars more than what we need may be a bad move. It’s a different story if we completely afford it but then again, if a large chunk of its repayment is pulled from our paycheck, then it’s time to think whether it will do us good in the long run.

We can still go from point A to point B using a second hand auto rather than a brand new one, can’t we?

Credit Card Debts

Credit cards can serve us well if used properly. However, if we are beguiled by the thought of swiping these plastics for just feel-good purchases and paying them later, then that can be quite alarming. Some less necessary stuff that people always use credit cards for are mobile phones, monster screen TVs, kitchen gadgets, clothes, shoes, collectibles, dinings, take-aways, home furnitures and the list can go on. Some people also max out their credit cards for over the top weddings, birthday parties, travels and even gambling.

If we start to rack up unnecessary interest charges and having difficulty settling even the minimum repayment, then there are signs of problem.

Personal Loans

Like credit cards, personal loan can be very helpful when used properly. A personal loan can hugely benefit us if we want to consolidate multiple debts. If we need cash in an emergency situation, personal loan can be an easier and faster access for such immediate need. However, like credit card, anyone can use personal loan for anything – yes, anything even things we don’t need. So this is when the debt we score using personal loan can become bad and it becomes worse when we are not able to keep up with its repayments.

Loan Sharks

Many people are aware of how loan sharks operate. They impose an extremely high interest rate for a loan that is payable in a short period of time. There is a particular type of lending which is pretty common in the Philippines where the borrowers surrender their ATM/debit cards to their lenders. Every payday, the lenders themselves withdraw the money from the borrowers’ cards ensuring of their repayments until the debt is fully paid. However, the lenders can enforced as much as 10% for that short-term loan. Sadly, many debtors get trapped in this type of unsecured loan as they are potentially compelled to take on loan again after their cards are repeatedly emptied.

Not all debts are bad. But then again, if debts keep us sleepless, make us poor, increase our anxiety levels, negatively impact our relationship with friends and families, make us feel to beat a hasty retreat and disappear or rattle our sanity… or make us callous, then we wind up with bad debts.

You see, debt is not the main issue here. It’s our behavior towards it and to money in general. I know that living within our means is already a worn-out cliché but it still holds very true to this day. It is okay to miss out on things we don’t necessarily need. It is okay not to keep up with the pressure of consumerism. It is okay not to follow influencers’ endorsements or keeping up with the everyday Kardashians in our society.

Bad debts, especially if it becomes out of control, will hurt us painfully. Maybe, start turning it around into good one or just try to avoid it. I can assure you, life can be a lot better.

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