Debt, in and of itself, is a scary idea. It implies that something is ‘owed’ and that you are tied down to obligations. You could be in debt to a bank, having taken out a loan to purchase a house, because how many of us can actually afford to buy a house in cash? 

But, one should not be overly fearful of debt. In this article, we explore the differences between ‘good’ and ‘bad’ debt, as good debt can help you on your journey to financial independence!

Good Debt

Good debt has the ability to generate money for a person and help build their wealth. This can improve a person’s quality of life in tremendous ways since good debts are considered as investments into one’s future. For instance, when the economy is prospering, the money spent on a university degree can often pay for itself within a few years after individuals join the workforce. 

According to the UK government (2019), better-educated people are more likely to be hired for high-paying jobs and are better equipped to find new ones if they need to. However, not all degrees are of equal value. Thus, it’s also important to think about both the short and long-term prospects of any field of study you might be considering. A good rule of thumb is to not borrow more than 1.5 times your first year’s salary for your university degree (Maldonado, 2020). Otherwise, you may not be able to meet the interest debt payments, thus turning good debt into bad debt. On the bright side, there are schemes like PTPTN, which are available to help students from lower-income families pay back their loans over a longer period of time. Thus, children from B40 or M40 families stand a chance to become more educated and find better-paying jobs, without the burden of having to pay back loans immediately. It’s also worth noting that good grades from a prestigious university and stellar extracurricular records aren’t the only determining factors as to whether an individual is able to pay back their student loans. Many factors come into play, but all in all, the loans provide a stepping stone to a brighter future, if one is prudent and cautious.

Another example of good debt would be mortgage loans. Mortgages are financial agreements, or loans, that allow individuals to borrow from a bank or other institutions to purchase a house or property. Although the interest in taking out a mortgage might be high in the long run, it is imperative to understand that real estate prices tend to appreciate as time passes. When deciding to sell the property, a person typically makes a sum of profit from selling it. 

To illustrate this with another example:

If a house buyer in KL were to pay RM1,500 in mortgage payments each month, but were to rent out their house for RM2,000 each month, they would gain a profit of RM500 per month. 

Even if the rental market isn’t looking good, first-time homeowners may opt for house sharing with other tenants to generate additional income to pay off their mortgage payments. This way, even if their rental income is less than their mortgage payments, the amount that would have been needed to rent a place elsewhere can be saved (ie. RM2,000). 

An additional benefit of mortgage loans is the freedom of having ownership of the property, alongside a number of tax benefits that renters do not get to enjoy in certain countries, like the US (Majaski, 2022). Furthermore, when budgeted prudently, purchasing more real estate and renting them out owned would lead to a stream of passive income. However, it is worth noting that Malaysian homeowners do not enjoy tax deductions on owning their properties and are taxed on rental income.

This applies similarly to business loans. Hence, before taking on any debt, it is always wise to carefully consider what return is expected. For instance, knowing the amount of student loan payments after graduation can help one figure out if they can afford to work in their chosen field and pay off the loan within an acceptable amount of time, or if they should change their major, or choose a more affordable university.

Bad Debt

What is bad debt? Bad debt usually refers to debts that negatively impact the financial well-being of the borrower. Did you know that according to the Malaysian Department of Insolvency, there are 269,654 bankruptcy cases in Malaysia, as of December 2022? These bankruptcies are usually caused by bad debts, of which 42% are caused by personal loans, while 14% are from car loans. Fortunately, bankruptcy rates have been declining, as more Malaysians become more self aware of their finances. Nevertheless, young adults should stay away from bad debts, as we will discuss below.

The main culprit here are personal loans. You can get personal loans from banks and licensed money lenders (note: not Ah Longs). In Malaysia, the maximum interest rate for personal loans is not fixed by law, but it is generally capped at 18% per annum by most financial institutions. However, it is usually advertised at 1.5% per month, in order to entice you with a less scary figure. Imagine if you want to buy the latest iPhone 14 now, and you borrowed RM4,000 in personal loans to afford it, you would have to pay an extra RM720 in interest at the end of the year.

Besides that, car loans are also bad debts in most cases. A car is a personal vehicle you might use to get from A to B, but it quickly depreciates and loses roughly half of its value at the 5-year mark. Therefore, a car loan, or otherwise known as hire purchase, is an unwise financial decision for youths. Possessing loan debts at a young age could hinder your other financial plans. A car loan could be a good debt, only if you use it to generate profit, such as providing e-hailing services (Grab), or using it for your business. Therefore, you should consider relying on public transport, or get an affordable second hand car if you really need one.

Credit cards are also bad debts. When used responsibly, credit cards can bring many good benefits, such as reward points and cashbacks. Many young fresh graduates get easy access to a card once they hit a monthly salary of RM2,000. However, many young Malaysians use them irresponsibly, and only pay the minimum amount required. This causes the debt to snowball, and leads to irreversible damage to their finances. If you cannot afford to pay the full amount, it is still a good idea to pay as much as you can, and consult with a bank officer to restructure your debt.

Buy now, pay later (BNPL) schemes are all over the internet lately, and many Malaysians are eager to give them a try. Many corporations provide BNPL facilities to encourage more spending, such as Grab and Shopee. However, BNPL makes consumers unaware of their financial situation, and induces more spending than they can afford. Similar to credit cards, the late payment rates can cause the debt to skyrocket.

In a nutshell, bad debts are not necessarily bad on their own, but when coupled with bad personal finance knowledge, it could bring catastrophic consequences. 

Example: Shopee SPay Later

Before applying for a debt, ask yourself. Can you afford this product and its loan commitments? It may be prudent to take out loans when interest rates are low. After all, this is the intended economic effect of a low-interest environment! Also, do remember that some loans can have ‘variable interest rates’.

To sum it all up, when debt is used well, it can be a great tool for us to leverage our investments and earn more profit. However, when debt is not properly used, it can lead to irreversible consequences that can plague the borrower for years. 

Ultimately, it’s crucial to make informed decisions about taking on debt and be responsible with our borrowing habits.



Researcher(s): Anne Ng Xin En; Kok Chun Yik

Reviewer(s): Sherilynn, Muhammad Bahari

Editor(s): Maryam Nazir Chaudhary

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