DEBT THAT CAN PAY OFF

Debt That Can Pay Off

Debt: four types of good debt that can pay-off

The word debt is normally associated with being a negative financial position, a burden. We’re so busy trying to destroy it, beat it and eradicate it, that we forget its real purpose. The reality is that debt is neither good nor bad. There are many wise ways to use it just as there are foolish ways. In fact, for many people, most often during the beginnings of career journeys, debt can be viewed as an important tool to build wealth.

The key distinction is that good debt is used for investment rather than spending. Where people run into trouble is when they use debt to spend instead of invest.

Ensure your income to debt ratio isn’t too high. UAE banks will reject finance applications if your debt to income ratio is over 50%. Use our debt to income ratio calculator to see where you stand.

Here are four examples of using debt as an investment:

1) MORTGAGE

Taking out a UAE mortgage to buy a property can be an excellent investment, especially in the UAE where there are great opportunities to profit from the real estate sector. Part of your payment goes towards building equity and equity is the biggest source of wealth for most people.

In addition to equity, you can fix a portion of your housing costs for the duration of your living there. Your equity grows as housing prices rise. Not only is housing inflation an asset to homeowners, but you also avoid rent inflation at the same time. This is particularly prevalent in Dubai!

Having equity will also allow you a better credit score, which will soon be a reality in the UAE when the Al Etihad Credit Bureau is introduced.

2) HOME EQUITY LOANS

Thinking about remodeling your home by tapping in to some of your equity? Taking out a home equity loan to renovate can be an excellent investment. Often, your increase in home value can exceed costs. The best part is you get to enjoy the new look of your home now instead of waiting. In Dubai, there are of course plenty of brand spanking new communities but if you own an older villa, it often makes good financial sense to borrow on your existing mortgage and upgrade or improve.

3) STUDENT LOANS

Isn’t a significant bump in your paycheck worth a little risk? Education costs, whether undertaking your undergraduate degree or returning as a post-grad to upgrade or expand your skill set. If you’ve done your research and feel that a course will benefit your employment and promotion prospects, then it makes sense to make the investment.

4) CREDIT CARDS

Wait! Aren’t credit cards those evil pieces of plastic that charge you up to 40% interest? Think again!

By not carrying a balance on your credit card i.e. by paying your balance off in full every month, you can essentially get free excess to a 30-day supply of money. Choose a card wisely as well and the rewards can be substantial from air miles to travel, leisure, entertainment and dining discounts.

So, what’s the catch?

We’ve established that debt is ok when used as an investment rather than for flippant spending but take note…an investment, by definition, means that risk is involved so you still have to be careful in making wise investments, because success is not guaranteed.

You can buy a house with an inflated price and lose wealth and money. You can complete a masters but find yourself unemployed. You can waste money remodeling parts of the home that have little resale value. You could be late on a credit card payment and be liable for fees and interest far beyond the benefit of using credit.

So do your homework and if there is a good chance you’ll earn a payoff, the benefits can far outweigh the risks and help rather than hinder you in building up your wealth.

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