Debt in our society seems to translate to trouble. Off the top of my head, it comes to me as being tied down to pay off what you borrowed. In recent years, even countries like the US and Greece came into the limelight regarding their debts. With all the negative notions surrounding debt, why do people go into it in the first place? First and foremost, debt is not intrinsically bad; like many things, it is how you use it that makes it good or evil. In Brunei, people have come to terms with living with debt and it’s become a way of life. I’m sure we have experienced that payday traffic jam and seeing people queueing up at banks to pay loans.

What is Debt?

Debt is the amount that is owed or due. Basically to accrue debt, you’ll have to borrow an amount in the first place. This is most commonly a loan given by banks but may also include amount borrowed from friends or relatives. While people close to you probably won’t chase you to repay them (that awkward conversation to ask for it is deterrent enough), it’s bad karma to not repay what you owe. Even worse is if the goon squad comes after you if you somehow borrowed from the wrong people.

Borrowing is usually done through approved financial institutions, particularly banks. What’s in it for them to borrow a large sum to you and me? Interest! The amount we pay back will always be more than the amount they give us. Banks are businesses and businesses need to earn money.

Why Go into Debt?

Let’s face it, if we could open a suitcase full of money to pay for a house costing 7-digits in cash, we probably would. But for many normal people (like me), it’s often not a realistic or even a probable action to take. Sometimes debt is inevitable especially if you want to make a large purchase, e.g. finance a house or going to University. It allows the majority of us to achieve goals we probably won’t reach (at least in a long time) through budgeting or saving up.

Many people in Brunei carry debt in some form or another and usually they are from:

1. Education

One of the biggest ball and chain of my generation is the debt of Education. In countries such as the United States, students take on student loans to go to University and start paying off when they graduate and get a job. In Brunei, we were fortunate enough to be able to have the support from the Ministry of Education who sponsored University degrees around the world. We were required to sign a contract promising to serve the country upon graduation, i.e. we are bonded.

What if you don’t want to serve? You’d be breaching contract and breaking the bond, requiring you to pay back what was awarded. Education and living expenses outside Brunei is not cheap either; my bill came to upwards of B$200,000 at the end of my degree. Not an amount I have under my mattress, I assure you.

Recently, with the weakened economy, the Ministry of Education began restricting scholarships to a select few. So in order to finance studies outside Brunei, students are forced to look for student loans or be sponsored by their parents.

Good or bad debt?

Ask many people and they will likely tell you Education is an investment. And I personally agree with this line of thinking. Education equips you with skills and knowledge which you can apply to problems in creative ways. It’s not just the skills taught through studies either, you will probably benefit from soft skills such as communication and teamwork. Life itself is a perpetual learning experience.

Pros:

1. Knowledge and skills gained.
2. Contacts made.
3. Experience of being independent.
4. Bond forces you to gain work experience.

Cons:

1. Job market is competitive if not unpredictable.
2. Bond does not guarantee a job.
3. Loss of freedom to work elsewhere due to bond.
4. Student loans may require repayment over a long term.

Overall education would count as a good debt due to the skills and experience you gain. If we strive to constantly better ourselves, I don’t see any reason why our earning capabilities wouldn’t increase accordingly.

2. Buying a House

The age old mentality is that real estate is a very secure investment, many who have gotten properties 20-over years ago are now reaping their rewards from rentals and/or sales. While it is true that this asset may increase in value in the future, it’s all down to supply and demand. Therefore, the opposite is true as well that value may decrease. In recent years, houses in Brunei have been increasing in price but it doesn’t seem to me like many people are looking for new homes. This plus the fact that there are so many houses being built and seeing so many “for sale” signages enforces my doubt.

Housing as an investment in Brunei is still doubtful because of the economy and small population. If your goal is to buy a house to stay in, I would say why not. Since you’ll be making full use of the property, you are not speculating on the price to increase; at least, not solely that. And once you pay off your loan, you will have one more asset in your portfolio.

Good or bad debt?

The banks in Brunei do not go below 5% annual percentage rate (APR) a.k.a. interest on your loan. So unlike other countries where you can shop around for the best interest rates, we’re stuck with a benchmarked rate. You still get to choose how long you want to hold on to your mortgage, though. This may be up to 25 years.

Pros:

1. Have an asset after loan is paid off.
2. Possibility of asset before loan paid off.
3. Feeling of having your “own” house is great.
4. Prospect of price increasing.

Cons:

1. 5% APR not likely to change in the near future.
2. Risk of price decreasing.
3. Hidden extra charges such as professional fees and insurances.
4. Maintenance charges not factored in.

Overall the fundamental rule for me is that if you’re in it to buy a home, it will be a good debt (not “financial-good” but good nonetheless). As an investment, as usual, it’s only good if you can earn money from it.

3. Starting a Business

Even before the economy contracted from the oil price slump in 2015, policies have been implemented to encourage businesses to set up locally. Usually what we see cropping up nowadays are eateries, cafes and (ugh) cube stores. Some are able to keep afloat for a while but many don’t and there’s been quite a number of closures recently.

Starting a business in Brunei is a mixed feeling for me. For one, there are many markets you can go into. On the other hand, with only around 420,000 population in Brunei, it will be tough to attract customers as locals seem to prefer spending money overseas. The fact that tourist arrivals aren’t that high doesn’t help either.

Good or bad debt?

Many local banks offer some sort of financing to help you start or expand your business venture. This debt, if used properly, will help you leverage on what you have now and improve your growth.

Starting a business is extremely challenging. From securing customers every month consistently to trying to grow it; nothing comes easy. Also, if you can’t manage finances properly, it’s best to hire someone else to do it for you too. That being said, many who do it properly seem to attain great satisfaction from building something and seeing it thrive.

Pros:

1. Be your own boss.
2. High reward.
3. Financing to get working capital fast.

Cons:

1. High risk.
2. Repayments and interest eats into your profits.

If you are able to turn a positive cashflow every month, then borrowing to do business is definitely a good debt. Not only will you gain assets from it, you could potentially make an impact on the local economy.

4. Buying a Car

Having a car in Brunei is a technical must. The public transportation here is not as well developed and are far in between. This makes owning your own transportation a necessity to get to where you need to go. That being said, we are fortunate that we do not have to pay COE (Certificate of Entitlement) like they do in Singapore. The COE makes buying a car in Singapore 2 to 3 times more expensive. Also, the petrol here is subsidised to only 53 cents a litre.

Some may save up to get a car but most of us will probably take a loan. There is literally “no choice” other than to walk or bike it (highly not recommended). Banks offer loans to cover the vehicle and repayments may be made up to a term of 7 years.

Good or bad debt?

As you have no choice but to get a personal vehicle, the debt you go into is more of a necessity than a choice. But the choice between a Toyota and Mercedes falls onto you as a need or want basis. That being said, you have to bear in mind that once your car goes on the road, its value instantly drops.

Pros:

1. Freedom of movement.
2. No reliance on public transport.

Cons:

1. Loan does not include amount you have to pay for insurance, servicing and replacing parts.
2. Vehicles usually depreciate in value.

Overall a car in Brunei or even anywhere else is never considered an investment. It’s a means to an end; in this case, a necessity to get around. It’s neither a good debt nor bad; just neutral. But if you bought one that’s beyond your means, it is definitely a bad debt.

(Bonus) 5. Personal loan

I’ve seen a few people refinancing their car or homes in order to have extra cash on hand. As I said in the beginning, many of us have come to terms to live with debt. The mentality might be from thinking “I’ve been paying off my loan all this time, what am I going to do with the extra cash?” Solution? Get another loan! Personal loans in Brunei carry a heavy price though; usually APR is around 7.5%.

Good or bad debt?

There is absolutely no reason to get a personal loan unless it is an emergency. And even then, there must have been a hole in your financial plan that didn’t cater for such an emergency. The worst things to use a personal loan for are:

1. Vacation
2. Buying designer clothes, gadgets, etc.
3. Buying gifts.
4. Furniture.
5. Investments.

As I’ve talked about in Investing 101, you should never borrow money to invest. Especially if you have to pay 7.5% interest on top! That means your investment has to consistently beat 7.5% just to break even!.

Using a personal loan to pad up your lifestyle is also pretty bad. It is unlikely the gizmos and cool stuff you bought will go up in value so they’re just a money sink with interest added on.

Pros:

1. Immediate money?

Cons:

1. High interest rate.
2. Usually no asset gained.
3. Depreciating values.
4. Leads to false lifestyle inflation.

Using money you don’t have is a sure way to get into trouble. This was the case during the credit card crisis about a decade ago when many people who use credit cards got into a financial slump when the debt collectors came. Definitely a bad debt to carry around and if you have this, try to pay it down as fast as you can!

Conclusion

While debt is not intrinsically bad, we have to be aware of their risks otherwise they could derail our lives. Used properly though, you have a chance of expanding your lifestyle but it will not be instant gratification. Many people need to learn to use debt to grow instead of supplement our lives because:

“Every time you borrow money, you’re robbing your future self.”

― Nathan W. Morris

But what is the best debt to have though? That would be the debt of gratitude.