As much as possible, people aim to be financially stable and secure. However, there are situations where people get financially exhausted, stripping all their resources. It could be because of an emergency, loss of resources, business expansion, and so on. No one wants to be in that situation. But if it is inevitable, one solution we see is debt. We rely on friends or relatives to borrow money, financial institutions for loans, and a legal money lender in Singapore.
Debt should not be entirely avoided. In reality, debt and loans lift the burden of costs put on our shoulders without warnings. Yet, without self-control, self-discipline, and proper financial management, it is easier for us to fall into the debt trap. Continue reading this article to learn more about debt and debt traps.
The Good Debt and Bad Debt
Debt is a sum of money or goods an individual owes to another person, organisation, or financial institution like the best money lender in Singapore. Debt needs to be repaid, depending on the agreed payment arrangement between the borrower of money or goods and the lender.
Most people view debt or the act of borrowing money as evil. It leads people to financial instability with its debt traps and cycles. However, it is not always the case. There are two types of debt: good debt and bad debt.
The Good Debt
There are many reasons why we borrow money from a relative or friend, an SG money lender or moneylendergroups, banks, and financing organisations.
Basically, good debt is the loaned money used to create wealth. Examples of good debts are a student loan, mortgage, and SME loan in Singapore.
Money invested in education is not a waste. In reality, it is beneficial. People with an educational background are more likely to be hired for paying jobs. People who don’t have the money to fund their tertiary education or masters programme opt for student loans.
On the other hand, entrepreneurs apply for an SME loan in Singapore to start their business or fund a business expansion. With economic stability and intelligent business decision making, the return of investments can easily repay the loaned money for the company operations.
The Bad Debt
Bad debt is the borrowed money on things that do not build wealth nor improve your financial stability. One good example is the credit card or any form of debt for consumerism. For example, borrowing money to pay for branded shoes or vacation does not entirely build your wealth. Although you can resell the branded bag, you sell it at a much lower price.
Another definition of bad debt is the sum of money you can’t repay.
What makes debts that bad? Debts can work against you if they have high interest rates as they cost you over time.
Can Good Debt Turn Into Bad Debt?
The general rule in money lending is don’t borrow the money you can’t repay. Too much good debt could potentially exhaust your resources. Sometimes, even an SME loan with low interest in Singaporecan fall into bad debt if your expected business outcome did not materialise due to a weak economy. The return of investments could also be slower than expected.
You can avoid this by preparing backup plans on how to pay off good credits when everything goes wrong.
Applying for loans and borrowing money from a legal money lender in Singapore without repayment plans can potentially lead to a debt trap, resulting in an unsustainable lifestyle.
The Debt Trap
The debt trap is a situation where the person’s income is not enough to pay off existing loans, resulting in piling up interest rates. For example, if an individual borrows a sum of money from an SG money lender or moneylender group to pay off an existing loan, the person is in the debt trap cycle.
How To Break The Debt Trap Cycle?
Have An Emergency Fund
Many people borrow money due to emergencies like hospitalisation and accidents. Ideally, a person should have emergency savings amounting to six months of their salary. It will provide a financial cushion and coverage for urgent situations.
Money management starts with having a budget plan for your monthly expenses and tracking your expenditure. Recording your monthly spending gives you an idea of where chunks of your income go and identify the spending areas you can cut back for savings.
Don’t Buy What You Can’t Afford With Cash
Credit cards give people a room to buy things they can’t afford to pay with cash. Some people only use credit cards for emergency uses. Self-control is needed if you use your card for daily expenses.
Pay Your Loans and Bills on Time or Early
Put your bills on your budget priority lists, whether it be utility bills and loan instalment repayments. Paying bills saves you from troubles that may arise due to late payments while you prevent the increase in interest rates of the loan you are paying off fromthe best money lender in Singapore if you do it on time or earlier.
Have A Stable Source of Income
If you are in a debt trap, you have no choice but to maintain a paying job or business. Firstly, you avoid borrowing money if you have a stable income and cash in hand. Secondly, paying a loan using borrowed money instead of the resources you earned will only bury your foot deeper into the debt trap.
Everybody, once in their lives, faced a financial crisis. No one wants to be in one, but when the situation gets tight, we rely on the legal money lender in Singapore.
There is nothing wrong with borrowing money, but it gets its evil appearance because of the horror stories and experiences of those who have been in the debt trap.
But what people failed to realise is that the real culprit is how the people spend the money they have borrowed. Learning how to control the finances and manage the budget will break the cycle of a debt trap and prevent you from getting caught in one.
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