The reason for borrowing
Logic dictates that any action backed by lending must ensure that in the long run the borrower will be in a better position than today, that is, they will have increased their assets. A loan, for example, to acquire a first home in response to the big problem of renting, or even for investment purposes such as short-term leasing or to acquire offices for a start-up business that will become profitable within a reasonable time horizon, are considered examples of good debt.
The amount of borrowing
The needs
There are various forms of borrowing available in the market, from credit cards and overdrafts to all-purpose loans. The “key” in this case is to know exactly what your needs are now and, as far as possible, in the immediate future, so that you can choose the product that best meets them. This implies thorough market research regarding the loan types and all additional information you need to know.
Simply put, it is important for a borrower to know the following in order for their debt to be and remain good:
Good debt
Enhances assets over time. In the above example of a business loan for the acquisition of offices, the borrower invests today in the growth of their business, in order to receive future income and profitability.
Keeps any savings intact. This is because repayment is made gradually from other resources, e.g. salary, without disturbing the living conditions or having to “touch” the money set aside. Evidently, the amount borrowed must be reasonable.
Improves your credit profile. Responsible management of a loan helps to “build” a good credit score. This will allow obtaining a loan in the future under even better terms, as the lender will now be aware of your credit behavior and, therefore, will be able to price accordingly.
Bad debt
Reduces assets. Investing in something that is not necessary, or loses value rapidly, means that over time assets are reduced. Likewise, a loan at a high interest rate, precisely because no thorough market research has been done beforehand, means extra costs, some of which could have been directed to other purposes.
Creates more debt. The more a loan fails to be regularly repaid, the more it increases – due to interest. So there is a risk that the debt will grow significantly, putting at risk any assets given as collateral.
Causes stress. People who cannot meet their obligations feel pressure and stress, factors that can affect their health and also clear thinking, which is needed to find the right solution.
Borrowing needs to be responsible. As much as lenders, such as banks, have adjusted their criteria and procedures to meet real needs with the least possible risk, borrowers must protect themselves by ensuring that their debt remains on the... good side!