Think carefully before you borrow
Every day social service agencies which offer budgeting and financial capability services see the destructive effects of debt as they work with individuals and families to try and get them on track and debt free.
The meaning of debt is simple – something owed for something borrowed or performed.
A lender loans you an agreed amount.
Until you repay the sum, usually plus interest and fees, you are in debt.
The danger of debt comes when money is unnecessarily borrowed or when it is borrowed without the means to pay it back.
It may seem crazy at first, but debt isn’t necessarily a bad thing.
It’s how you use it that’s good or bad.
And if you use it the right way, debt can have a lot of benefits.
It sounds complicated, but it doesn’t have to be.
You just need to know a few things about how debt works and how to use it in your favour.
Good debt is when you use the money lent to you to buy something that offers a return on your investment.
A mortgage is considered good debt.
Assuming the value of the house will go up over time, you will be able to make money when you sell it.
Students loans can also be considered good debt if you are investing in your education so you can get a better, higher paying job in the future.
Credit cards can also be good debt – but in a different way.
When you use a credit card and pay it off in full and on time each month, it helps you build your credit history and credit score.
It shows lenders that you can take on debt and handle it responsibly, which will help you get a better deal on other, bigger loans, like a mortgage, at some stage in the future.
Bad debt is basically when you use a loan to buy something that loses value over time or doesn’t offer you any return on the investment – so no way for you to make money on the purchase.
A loan to buy a new car is considered bad debt, because the car loses value the second you drive it off the yard.
That’s why buying a used car is a better deal, unless you plan to keep a new car for at least 8 to 10 years.
Sometimes circumstances may mean you just have to borrow.
Go to the budget advisor/ financial capability agency that will give you good and free advice.
They will also give you information to help you at least understand the cost of the decision you are about to make.
The Ministry of Consumer Affairs have brochures such as ‘‘Before You Borrow’’ which give you the 10 questions to ask before you sign up.
And finally, be very wary of the mobile traders or truck shops.
Mobile traders offer a range of different products.
Almost all products tend to be sold at prices which are significantly higher than the cash prices for a comparable product purchased from a mainstream retailer.
For example, a mobile phone sold by the mobile trader at $1950 to $2152 could be purchased elsewhere for $494 to $899.
Or a PlayStation at $1500 from the mobile trader but elsewhere $390 to $530.
Mobile traders appear to rely on repeat business with existing customers which they frequently approach to sell additional goods when they are close to paying off the amount owed.
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