When do you consider that it is a good debt? How do you manage it?
It is a good debt, if you are going to use the debt for assets, money-making assets. So one of the investments that we have is in the agriculture business. And there is a certain loan that we call crop loan. When you have a crop loan from the government, you have a certain amount of interest, sometimes it’s 6% and you pay it in two years time. So meaning, your 6% is per two years. Per year, strictly speaking, you’re interest per year is only 3%. But you have to pay it with the principal and interest, of course, after two years.
So if you’re able to pay it, it’s like you only had 3% interest. And that for me is fantastic if you’re going to use your capital, and that capital is not from a loan, meaning that your cash-on-hand is your capital. elsewhere. You’re going to use it to buy another business, start another business, or buy real estate and rent it out. And then use the bank’s money, meaning, your loan to finance your other business or your agriculture business, that for me is a good kind of debt.
Or for example, same with real estate, if you’re going to borrow from the bank and the interest is much smaller than the amount of money or revenue that you’re going to get from the rent. For example, if you’re going to rent out the property, then it makes sense to loan it from the bank. That way, you lessen your risk because you’re not risking your own capital, if it’s all you have, or if it’s a very big amount of what you have, cash on hand, then better to borrow from the bank. That is my opinion. That is a good kind of debt.
A bad kind of debt is if you’re going to use the debt for a liability. Things that you want and not need – car, or house that you don’t need, house that you’re not going to live in and you just want it for rest. That for me in my opinion is a bad kind of debt. So anything that is not an asset, not a money making asset, and you take out a loaner or debt for that, I think that’s a bad kind of debt and you should get out of it as quickly as possible.
What is your strategy on getting out of bad debt?
First and foremost, don’t do it. Personally, I haven’t gotten into bad debt. I make sure that if I’m going to borrow from the bank for a, strictly speaking, not an asset, like for example, a vehicle that I want to purchase. I make sure that I have cash on hand to pay it and I won’t be having any disadvantages when I pay it cash. Meaning, I have excess cash and I could pay it outright, but I’d rather loan from the bank because it’s a good relationship with my bank manager and also, it helps with my credit. So that is strictly speaking, not a bad debt. But I did take a loan, so that is debt for something that’s not a money-making asset.
Getting out of bad debt, strategies, you have to negotiate with a debtor. You have to negotiate from the people or the bank that you ask money from. You have to have a debt payment plan or debt free payment plan, if you fail to pay the debt for the first time – but definitely you have to get out the debt as quickly as possible; there is no other way.