Contrary to the general perception that debts are always bad and, if not managed well, can leave one in a big financial mess, they can sometimes be good as well. For instance, credit card debt is certainly a bad debt, but that is not the case with an education loan or a home loan, which help you get your desired education or acquire your dream home. Similarly, a personal or business loan which helps you grow your own business is also a good debt.
Satyam Kumar, co-founder, Loantap, says, “The Chinese philosophy of Yin and Yang mandates that everything has a tangible duality. In this universe of dualism, Yin corresponds to the negative or passive aspects, and Yang, the active or the positive. The philosophy finds its widespread application in the day-to-day life processes since Yin and Yang are considered symmetric and opposite in nature. More like two sides of a coin, the good and the bad, the light and the dark, as well as favourable and adverse.”
We’re well aware about bad debts that spiral you down in a vicious debt trap, but there are also good debts which not many of us seem to be aware of. They can actually work in your favour and offer you greater financial stability than you may imagine.
The Yang of Debt:
As much of a hassle it is, “a debt can also be quite beneficial. It can help you take prudent decisions and enable you to get hold of financial resources in the time of need. The biggest benefit that a debt brings with it is that irrespective of its scale and size, it creates a good credit history for you and boosts your credit score,” says Kumar.
To help you understand better, credit history is quite like an Aadhaar card or a passport. You can become a borrower without having a credit history, much like you’re an Indian national even if you don’t have these two IDs. However, once you have a credit history, the window of opportunity widens.
The credit score shows your ability to make repayments. The higher your score, the more favourably banks would evaluate you. You need to recognise the fact that banks and other lending institutions offer you loans for getting a good return on their investment. “An unavailable credit history and score directly translates into increased difficulty for the bank in assessing the loan proposal. On the other hand, if you have a decent credit score, it displays good credit discipline and significantly reduces the credit risk. This reduced risk increases a lender’s willingness to forward additional privileges to the borrower in the form of relaxed loan terms,” informs Kumar.
Availing a small personal loan and making timely payments roughly about six months before a big debt, let’s say a home loan, can dramatically improve your credit score. This will help you get your loan more seamlessly and along with more relaxed loan terms. The personal loan being the veritable ‘Yang’ in this case.
However, availing multiple loans with poor repayment would act as multiple ‘Yins’ of debt. So you need to ensure that you never tread on the other side.
According to experts, the best way to differentiate between a good debt and a bad one is to find out whether that debt is a sensible investment in your financial future or is going to have a positive impact on your overall financial position? If the answer is yes, then that is a good debt. If not, better keep off from that debt.
Manish Chaudhari, co-founder and chief risk officer, CoinTribe, says, “If you are a businessman, then you need to know: is the debt going to help your business grow? A debt which will help your business grow and thereby provide positive returns is not a bad thing to have. Secondly, you need to find out is the debt going to help the business leverage but not become overleveraged? The debt trap hits a business when the leveraging, which is the way to expand business, turns on to make the business overleveraged. The availability of credit should not be the reason for taking debt, rather the opportunity and the capacity to repay should decide whether the debt should be taken or not.”
Thus, maintain good credit discipline and always pay heed to your financial health – and you’ll be making the most out of this aesthetic duality!