This is a guest post by Charles Chua from All About Living with Life.

Getting a loan from a bank or borrowing from your friends means you are in debt. You will end up paying more to make purchases because you have to pay interest for the debt.

How do you distinguish between good debt and bad debt? Here are some examples:

Good debt

Education: You get an educational loan to do advance study. This is an investment in you. With the knowledge you gain you will be more insightful to work effectively and enhance your earnings and pay off your loan.

Housing loan: This is a major purchase and a roof over your head is necessary. This is a good investment as land is limited and your property value will appreciate in due course.

Car loan: This is another necessity in life so that you can move around easily and quickly. A car does not appreciate, but depreciates over time, but you save valuable time moving around to get things done. Get a car loan only when you can factor in the monthly repayments into your budget.

Consolidated loan: It is a good move to consolidate all your credit card balances into a loan with very much lower interest rate. You will pay off the debt in less time with less interest.

Investment: When you know it is a solid investment opportunity and the value of your investment will increase in the long term.

Bad debt

Buy what you want: Buying something for no practical uses and get yourself into debt is a no-no. Don’t get materialistic.

Renovate or beautify your house: Your house is in good condition, so don’t spend unnecessarily to renovate or beautify your house.

Adding accessories to your car: You car is shinning and new; don’t borrow money to add gadgets with no practical uses or improvement in its performance.

Overseas holidays: It is better for you to save up a sum for the dream holiday. It costs less and you are not in debt after an enjoyable holiday.

Borrow only when you can get a better return or to build wealth, otherwise don’t borrow to spend unnecessarily.


Personal finance author and trainer

    13 replies to "Bad Debt and Good Debt"

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    • J. A. Streich

      I don’t believe there is a such thing as “good debt”. Let’s take a look:

      Education: Choose a cheap school, close to home. Beg and search for scholarships and grants, put in thousands of applications. Work, even if it means taking semesters off school. Federally insured college loans are not dischargeable in the case of bankruptcy. If you have student loans, don’t keep them around simply because they have low interest rates, pay them off like any other debt (treat them like a credit card).

      The myth is that pedigree and degree matter forever, the fact is most businesses only care about education if you don’t have the experience. So, you need a degree to get a first or second “real” job. After that, no one cares where you went; they care what you can do for them — and that’s best messured by what you did at your last job(s).

      Housing loan: This is the only type of debt that I think is acceptable; but it’s still not good. If you are intense, then you can do the 100% down method of home buying. But, even then pay it off early, and don’t buy more home than you can afford. It should be bellow 25% or 35% of your Annual income.

      Car loan: You can have a car without a loan. It is not a necessity of life. $2000 will buy you a used clunker. It will get you where you need to go. It won’t lose much value (as there is little value to lose, and you’re not sitting on it a long time). While you drive it a few months, you save another couple of thousand dollars. Sell your last car for just about what you paid for it, add the couple of thousand you saved and now you own a $4000 car… Keep doing this. Never need a loan and you can own pretty nice cars in no time at all. I currently have 2 paid for cars, will be selling them shortly to by one better car. The value of cars, especially new cars, falls so fast that to borrow for one doesn’t make any sense. Instead of a cash for clunkers program, my family has a clunkers for cash program — we buy clunkers (well, actually our cars aren’t bad these days) for cold hard cash.

      Consolidated loan: This assumes you have anything to consolidate, and this doesn’t address the real issue. Consolidating loans makes your minimum smaller, and if your not wise to it, can encourage people to spend more time in debt. Especially because the behavior that got you to the point of consolidation hasn’t been addressed — spending more than you make. Live within your means and you won’t need to consolidate, because you won’t have to borrow anything.

      Investment: All investments are risks, no matter how “solid” the investment. Buying on margin or gambling with “other people’s money” is just asking for a call from Murphy (of Murphy’s Law). Only invest money that you actually have, and that you don’t need for other things. Investing is a good idea, it’s almost essential, but doing it on someone else’s dime is folly. Henry Ford and J. C. “Cash” Penny both condemned the use of debt as folly. Walgreens and Microsoft are both debt free. No reason to think that to make a great investment deal means you have to borrow money.

      • KCLau

        Thanks for your opinion. Debt is just a tool.
        For those who don’t know how to make use of this tool, it is certainly “bad”.

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    • Anonymous

      I intend to buy a landed property worth RM278K. If I have around RM100K cash, should I put in RM100K for down payment? Or should I put in less? I have no experience in buying property. I do not know whether the percentage of interest differs depending on the down payment amount or not. Please advise.

      Do you think it is smart to withdraw money from EPF to top-up the down payment as well? Are we eligible to withdraw money from EPF more than once (Let’s say we buy 2 properties at different year, are we able to withdraw money from EPF to finance both properties?

      • KCLau


        Normally, banks give better package if your loan amount is higher. You can take the flexible loan package where you get maximum loan amount, then put in the cash you have to offset the interest. You still have the flexibility to withdraw the money if you need it in future.

        For EPF withdrawal, it all comes down to the effective interest rate. When EPF is paying more than 5% return while your home loan only charge 4%, you will get your a better return for your money if it is remain in EPF.

        If not mistaken, you can withdraw from Account II for one house at a time. It is better to check with EPF to verify this.

    • Ian Kree

      Hi Lai Seng Choy, You made a good comment there. I second you.

    • Lai Seng Choy

      I believe we should first evaluate whether all these “spendings” are “needs” or not before anything. If these are “needs”, we should then look into how to fund them. Of course, first and foremost, if you can foresee and have planned these “needs” early, you may already save enough to get them. In this case, loan can be avoided and loan interest can be saved. If they are urgent “needs” and you do not have enough fund, shop around for the best loan rate to get them. These are “good debts”. If they are “wants”, any spending on them may not be seen as mandatory. We should not borrow to fulfil our “wants” and any loan on them are “bad debts” that would not give you any return.

    • Ian Kree

      Thank you, Charles, for sharing.

      My 2 cents; when you categorising car loan as good debt, it must come with words of caution.

      #1: Unless you are a public figure or a businessman, who needs good image, do not buy expensive luxury/imported car. Get an ‘OK’ car which is suitable for your lifestyle (think of medium-long term’s lifestyle). From my own experience: I am working in manufacturing industry; and I see some manufacturing operators are driving brand new Waja, while some/few engineers are driving old/used Kancil. As for those engineers mentioned; they are spending less for their cars, more for other things or savings/investments. Good debt! As for those operators mentioned; they are spending too much for their cars, less for other things e.g. children’s education. This is when car loan becomes bad debt!

      #2: And car owners seldom keep their cars until full settlement; they trade their car for more expensive car. This is good for car manufacturers, car importers/exporters, car sellers and for banks (and for our country, Malaysia). But this is not good for car owners themselves. My advice, keep you car until and beyond full settlement, well as long as you can. After the car loan is fully settled, use that extra money for other expenses OR better, invest e.g. buy another house (i.e. pay monthly instalment) – for investment! (My car is nearly full settlement, yipee!)


      • GenY

        I dont agree with you to keep your car until and beyond full settlement, well as long as you can. Unless your car is a super high quality car or you do not mind to spend thousands in maintenance, then I believe your car can last until your old age.( I dont think it can last until you die)

        Anybody with a sound mind understands that it is better to get a new car than spending thousands to maintain the car.

        Guess you have got it wrong

      • Charles Chua C K

        I traded my Wira for a Persona just after Chinese New Year after having used it close to 15 years. I agree with you, change it only when you have to. Thanks for sharing

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