Good Debt vs. Bad Debt: What’s the Difference?
Materialism has seen an increasing trend among Cambodian young people. They borrow money or loan money from the banks to buy modern materials such as smartphones, cars, motorcycles, etc. At the same time, there are also other groups of people who borrow money from the banks, they not use that money to buy such materials but they use the money to invest or run a business. What are the differences between these two types of debt? Here are some essential advices from a Cambodian land investor about debts.
1. Bad debt
Bad debt refers to borrowing money to buy a car, buy a mobile phone, buy a variety of materials to show off. The price of those materials will drop from day to day. In other words, having a car, you have to pay a lot of money such as gasoline and maintenance services. If you loan a car then the interest rate is increased massively overtime. For example, a $ 30,000 of a car loan would have 12% per year of interest rate. Moreover, at least $ 300 to $ 500 to be spent to fix your car when it is required, or maybe more than a year or two later, the price of the car can be dropped to $ 25,000. Therefore, this is not a good debt as you may pay a lot of money to buy liability while you will need to pay regularly to be able using it.
2. Good debt
Good debt refers to any debt that money is being borrowed to invest, expand the business, buy the property, which will increase profit over time, for example, borrow money to earn 12% interest per year and expand a business that can profit 25% to 30% per year after repayment of interest, you make at least 13% to 18% profits.