Good debt vs questionable debt: Marina and Nicci share their stories
Believe it or not, most Kiwis have debt. But the question is:
what is good debt, and what is questionable debt?
"I learned my lesson with questionable debt," Marina admits. "We needed a new car, so we got a personal loan to cover the $9,000. We sold the car years later for $3,000, and by that time we'd paid over $12,000 to the loan company. Every year we owned that car, it lost money. Basically, it lost value faster than we could pay the debt off."
Marina spent $9,000 more on the car than she sold it for because she used a personal loan to buy the car - this is an example of questionable debt.
A car is a perfect example of a value-losing asset - it starts to lose value from the moment you drive it off the car yard. Using debt to purchase value-losing assets is an example of questionable debt.
But most of us need a car. So what would Marina do if she could make the choice again?
"Well, we needed a good, reliable car and we didn't have all the money, so a loan was necessary. But I've since discovered that instead of borrowing the whole $9,000, we could have borrowed half, dipped into our savings for the rest and the loan would have been that much more affordable."
Examples of Questionable debt
- Electronics / furniture - big ticket items that will not hold their value
- Credit card bills that are not paid off in full
- Buying items on interest-bearing store cards
- Holidays paid for using interest-bearing debt, i.e. credit cards
Believe it or not, not all debt is bad - in fact using debt to purchase value-building assets can be beneficial.
"My boyfriend is at university, and while his student loan is huge we both understand that in the long run, the debt will be worth it," Nicci says. "It's really easy to get worried about the loan but with a degree under his belt, he'll have far better job prospects and earning potential."
Examples of value-building assets, or good debt:
- Like Nicci says, education can be classified as good debt
- Owning a property/business are also examples of value-building assets. Why? Each has the potential to hold their value over time, grow in value, or even provide ongoing income
Watch the video
Click here to watch Rae, Marina and Nicci discuss ways to use debt to your advantage.
Talking Money Sense: How to manage your debt
Rae's guide to managing debt
Click here for Rae's guide to using debt to manage your budget and lifestyle.
The questions you should ask
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Get yourself out of the red!
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The content of Talking Money Sense is general in nature, is designed for information purposes only and is not intended to constitute financial or other advice. Information is subject to change. Westpac New Zealand Ltd.