The topic of debt has always garnered a cyclical view especially in a conservative society such as Singapore. However, is it all that bad? What if we tell you that major economies were built on debt? Let us discuss the ups and downs of being in debt and how it can be used to generate income. As contradicting as this may sound, it’s indeed possible.
First of all, it’s highly integral for us to understand that there is a variety of debts within an economy. In this article, we shall discuss two main branches of personal debt – unsecured and secured debt. The main difference between the two is that secured debt requires collateral to be pledged, for instance, a home loan or a car loan, whereas unsecured debt does not require collateral and it’s usually based on the borrower’s creditworthiness.
It should also be viewed that the money we have now is going to be worth more than the exact same amount we have in the future (time value of money concept). This can also be seen through inflation within our economy. 20 years ago, the exact same house we live in would’ve cost us barely a fraction of what we paid today. Also, the cost of transportation has risen quite significantly since the 1990s. This clearly suggests that the value of money depreciates with time assuming it is left alone without any form of growth opportunities.
Likewise, from the above example, if we had purchased a house 20 years ago, the amount we would’ve paid in total for financing (including interest charges) the house, would not even be close to the amount higher we can sell it for today. That’s because of the exponential increase in house prices compared to the yearly inflation rate. As such, it would’ve made perfect sense to take a loan and be in debt back then, cause we would’ve acquired an asset that is worth so much more in terms of price and value today.
However, if we had purchased a car 10 years ago, the value of it would’ve depreciated yearly to probably a small fraction at which we had bought it for. Does that actually mean we should never buy a car or own any forms of liabilities? Ideally yes, but we should always put into context our standard of living as well. If buying a car allows us to travel in comfort then why not?
Also, not all liabilities are equal to each individual. Consider the example of a car. If a grab driver incurs debt in the form of a loan for a car, then it can actually act as an asset for the driver. That’s due to its ability to generate income for the grab driver. As such it’s important to evaluate the role of our purchases since not all assets or liabilities are equal for each of us.
On the topic of unsecured loans (loans from credit cards, licensed moneylenders), it is important to consider that a completely clean record could also be of adverse effect to our creditworthiness. How so? For us to take a loan, first of all, the institution providing the loan has to make a judgment on the chances of us (borrowers in this case) defaulting on the loan and our ability to pay or service the loan in a timely manner. In this case, if the borrowers come with a completely clean record, it might be slightly difficult to make a clear and objective judgment, since they do not have prior references to look at before approving the amount of loan. This may on the contrary to popular belief, hinder the amount of loan the institution might be willing to provide. In this case, no debt would have an adverse impact on the chances of maximum loan approvals.
Last but not least, let’s discuss one of the most common misconceptions between price and value. Many of us may use these terms indifferently, but both of them may actually mean completely different things. Something with a high price may not be the same as something with value and vice versa. These concepts can be better explained using the stock market for instance. A stock may have a very high price but it may be due to it being over-bought rather than valuable.