{UAH} Good vs Bad Loans
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Good vs Bad Loans
"I love loans" with such enthusiasm the speaker at a business breakfast said, and I believe many in the audience were curious to know more. With the not in the far past stories of #Bailout and #CraneBank toxic loans, who would love loans? We have heard so many stories with sad ending on loans and some of us have thence been intimidated by loans. Some of us actually pride in being loan free!
While it's possible to live completely debt-free, it's not necessarily smart. Very few people earn enough money to pay cash for life's most important purchases: a home, a car or a college education. The most important consideration when buying on credit or taking out a loan is whether the debt incurred is good debt or bad debt.
Good debt is an investment that will grow in value or generate long-term income. Taking out a mortgage to buy a home is usually considered as an example of a good debt. Home mortgages generally have lower interest rates than other debt, plus that interest is tax deductible in some countries but not in Uganda. Even though mortgages are long-term loans (20 years in many cases), those relatively low monthly payments allow you to keep the rest of your money free for investments and emergencies. The ideal situation would be that your home increases in market value over time, enough to cancel out the interest you've paid over that same period.
Business loans and real estate loans are good especially if return on investment is higher than the interest to be paid on the loan. The problem only comes when we take business loans and use them to finance personal expenses. The best type of loan is loan that builds wealth over the long run.
Bad debt is debt incurred to purchase things that quickly lose their value and do not generate long-term income. Bad debt is also debt that carries a high interest rate, like credit card debt. The general rule to avoid bad debt is: If you can't afford it and you don't need it, don't buy it.
"When you buy something that goes down in value immediately, that's bad debt," says David Bach, CEO of Finish Rich Inc., and author of "The Finish Rich Workbook." "If it has no potential to increase in value, that's bad debt."
"Total personal debt should not exceed 36 percent of your total income," says Gelb. Though here in Uganda the banks take it at 35% when they are assessing to know the maximum loan you can be eligible for.
The 28/36 Rule is the rule-of-thumb for calculating the amount of debt that can be taken on by an individual or household. The 28/36 Rule states that a household should spend a maximum of 28% of its gross monthly income on total housing expenses and no more than 36% on total debt service, including housing and other debt such as car loans. This rule is used by mortgage lenders and other creditors to assess borrowing capacity, the premise being that debt loads in excess of the 28/36 yardstick would be difficult for an individual or household to service and may eventually lead to default.
What is your loan experience, good or bad?
Compiled by Lilian Katiso
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-- "I love loans" with such enthusiasm the speaker at a business breakfast said, and I believe many in the audience were curious to know more. With the not in the far past stories of #Bailout and #CraneBank toxic loans, who would love loans? We have heard so many stories with sad ending on loans and some of us have thence been intimidated by loans. Some of us actually pride in being loan free!
While it's possible to live completely debt-free, it's not necessarily smart. Very few people earn enough money to pay cash for life's most important purchases: a home, a car or a college education. The most important consideration when buying on credit or taking out a loan is whether the debt incurred is good debt or bad debt.
Good debt is an investment that will grow in value or generate long-term income. Taking out a mortgage to buy a home is usually considered as an example of a good debt. Home mortgages generally have lower interest rates than other debt, plus that interest is tax deductible in some countries but not in Uganda. Even though mortgages are long-term loans (20 years in many cases), those relatively low monthly payments allow you to keep the rest of your money free for investments and emergencies. The ideal situation would be that your home increases in market value over time, enough to cancel out the interest you've paid over that same period.
Business loans and real estate loans are good especially if return on investment is higher than the interest to be paid on the loan. The problem only comes when we take business loans and use them to finance personal expenses. The best type of loan is loan that builds wealth over the long run.
Bad debt is debt incurred to purchase things that quickly lose their value and do not generate long-term income. Bad debt is also debt that carries a high interest rate, like credit card debt. The general rule to avoid bad debt is: If you can't afford it and you don't need it, don't buy it.
"When you buy something that goes down in value immediately, that's bad debt," says David Bach, CEO of Finish Rich Inc., and author of "The Finish Rich Workbook." "If it has no potential to increase in value, that's bad debt."
"Total personal debt should not exceed 36 percent of your total income," says Gelb. Though here in Uganda the banks take it at 35% when they are assessing to know the maximum loan you can be eligible for.
The 28/36 Rule is the rule-of-thumb for calculating the amount of debt that can be taken on by an individual or household. The 28/36 Rule states that a household should spend a maximum of 28% of its gross monthly income on total housing expenses and no more than 36% on total debt service, including housing and other debt such as car loans. This rule is used by mortgage lenders and other creditors to assess borrowing capacity, the premise being that debt loads in excess of the 28/36 yardstick would be difficult for an individual or household to service and may eventually lead to default.
What is your loan experience, good or bad?
Compiled by Lilian Katiso
"When a man is stung by a bee, he doesn't set off to destroy all beehives"
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