debt must avoid
Financial Literacy - June 1, 2022

3 Forms of Debt You Must Avoid

The economic uncertainty that was occasioned by the Covid-19 pandemic has plunged many into debt, especially in many African countries where poverty was prevalent pre-pandemic. However, not all debts are bad, but you must learn to avoid the destructive ones.

When it comes to minimising interest costs and keeping debt under control, knowing which types of debt you must avoid in your finances is critical.

So, if you’ll almost certainly have to take on debt at some point in your life, you’ll need to determine whether it’s worthwhile. 

You’ll also need to recognise when the benefits justify the interest expense. On the other hand, good debt is beneficial to your financial future, whilst bad debt is detrimental. Fortunately, what you’re buying usually makes this distinction evident.

If you’re borrowing to buy a depreciating asset, it’s bad debt. To put it another way, if it won’t increase in value or provide money, you shouldn’t put yourself into debt to buy it.

Here are 3 forms of debt you must avoid.

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1. Cars

While you may find it impossible to live without a car, borrowing money to purchase one is not a good financial decision. 

The automobile will already be worth less than when you bought it when you leave the car lot. Paying interest on an automobile that is constantly losing value is detrimental to your financial future. 

If you can’t afford to pay cash for a new car, look for a well-maintained used one and manage it until you have the financial capacity to buy a better one.

But if you have to borrow money to buy a car, look for a low-interest or no-interest loan. You’ll still be investing a significant sum of money in a depreciating asset, but you won’t have to pay interest on it.

2. Borrowing to buy clothes 

Clothing is believed to be worth less than half of what buyers spend for them. 

Of course, you need clothes as well as food, furniture, and a variety of other items but borrowing money to buy them isn’t a sensible decision.

If you must, you can borrow money to buy clothing, but make sure you can pay off your entire balance at the end of the month to avoid it running into the next month and avoid interest charges. 

3. High-interest loans

Payday loans are ten to fifteen times worse than regular loans. You obtain short-term funding to help you get through a difficult situation and post-date your salary in the hopes of repaying the debt on your next payday.

If this kind of debt is defaulted on payback day, it will be referred to a debt collection agency, whose mission it is to contact the borrower and collect the money owed to them. 

Defaulting will lower your credit score significantly, impact your ability to obtain future credit, and may result in the confiscation of personal belongings.

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