How does Debt Work?

How does Debt Work?

Posted by Adam Choong on

Every debt has a cost. In order for you to handle debts correctly, you must first know what the cost of incurring a debt. Let us look at the most common kind of debts.

Relatives/Friends Debt

This debt is usually the cheapest. If you are lucky, you can even score an interest free debt. But this kind of debt is not free because it is the debt that you must pay off unless you do not mind cancelling the relationship. This debt is the cheapest but the most common reason why people fall out.

Bank/Financial Institution Debt

This is the most common type of debt. Provide the banks or financial institutions with your financial statements and if it seems healthy enough, you get a loan. The cost is usually between 5-12% per annum of the amount loaned. You will usually need to be the guarantor of the loan. If your business goes bust, the lawyers can still seize your personal assets.

Supplier Debt

This is usually for businesses with inventory. You get a loan of 30 - 90 days from your supplier in the form of goods. This is the best kind of loan because it is interest free and it generates immediate cash flow for you. However, such debt can turn bad if you cannot turnover the inventory within the credit period.

Black Market Debt

The worst debt to go into but the easiest to obtain. These debts cost really high. Sometime even up to 200% per annum. However, it is the most easy to obtain. No documents required at all. Alas, if you can't pay the debt off, the method of debt recovery can be unconventional.

How to make debts good?

Making a debt good is extremely straightforward. You must invest the debt and the returns must be more than the cost. So for example:

I borrowed $100 for the cost of $15. I bought a handbag with the $100 borrowed and resold the handbag for $130. So after paying off the initial debt plus cost of debt, I have $15.00 left. So that $100 debt was a good debt because I made $15 from it. Now take this at a larger scale and that's how most affluent people get rich! 

Now look at bad debt. Same thing, I borrowed $100.00 at the cost of $15 and I used the money on my own handbag. I am now $115.00 in the red. Now take this at a larger scale and you will understand why the world is losing the battle against debt.

Any kind of debt can make you rich. Sadly, majority of people in the world use debt for expenses instead of investment. Hence, the world is seeing more and more people owing money. It is never too late. Start learning how to make debts work for you and everything will change. 

If you are a business owner and is neck-deep in debts, consult us and we can teach you to make debts work for you.


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