Malaysia's Household Debt Issue and How to Overcome It?

According to economists, Malaysia’s household debt level is still a worrying trend even though the ratio to gross domestic product (GDP) has declined during the first half of 2021. It had declined to 89.6% from a peak of 93.2% as at the end of last year (and 82.7% in 2019). While everything looks good on the surface, the financial health of most households in Malaysia needs improvement. Debts can be classified into two types which are good and bad. Yes, some debts can be good to have too! In this article we will discuss these two types in detail and how you can manage them better.

Good debts as part of your household debts are usually a form of valued investment that helps to increase your earning capacity, net worth, or generate income. Having any of these will be a pretty good sign that it is a good debt for you. Here are some examples:

Student loans or higher education debts

Although there are many university dropouts these days, a university degree is still a stepping stone to many careers out there. Having a degree or a diploma will increase your chances of securing a higher-paying first job and potentially boosts your prospect. So higher education debt is more likely to be paid off after you start work.

Mortgages for property investing or homeownership

Unless you have a large inheritance, owning a property will require a mortgage or a housing loan. A mortgage is a debt to the bank that has to be repaid in the long term. Why is this a good debt for you? Because in the long term, it significantly increases your net worth due to asset appreciation. After securing a mortgage, the value of the property is tied to your net worth and usually, the value of property always increases. Taking out a mortgage for investment, for example, taking a loan for the property and leasing it for the monthly payments can even help you to generate income. As your net worth increases and there is a high possibility of cash flow as well, it is the reason why mortgages can be considered as good debt.

Bad household debts start to accumulate when you have the urge to borrow money to buy things that depreciate such as fashion items, technology, smartphones, jewelry, etc. These materialistic items only provide you with short-term satisfaction.

Vehicle loan

Financially, buying new vehicles is a bad decision to make. The moment you sign the papers to turn a car from “New” to “Owned”, you will start to lose about 10% of the value of the vehicle. The longer you own the car, the more it depreciates due to long-term wear and tear. It might be a necessity for work, but you need to budget your finances to make sure whether is it worth it getting into heavy debt over a depreciating asset.

Credit card interest payments

It is a good idea to have a credit card as it is one of the easiest ways to build your credit scores for a mortgage loan as mentioned above. However, it is only preferable if you pay off the remaining balance every month. If you are a big spender who is unaware of your limits, you should think twice before applying for one because you might end up bankrupt when you can’t repay your accumulated debts.

Of course, if you are currently facing any financial difficulty, no matter business or personal, you can always look for us at Finsource Credit where we offer different types of loans that might be suitable to you such as clean loans, property loans, or 2-in-1 loan. We also provide credit counseling from our professional advisors!

Remember, if you need any sort of immediate financial solutions, you can always look for Finsource Credit.

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