For many Singaporeans, the word “debt” instantly triggers anxiety. It’s often associated with sleepless nights, unpaid credit card bills, and mounting interest that never seems to end. But here’s the truth: not all debt is bad. In fact, borrowing can sometimes be the very tool that helps you move forward in life—whether it’s getting your first HDB flat, furthering your education, or starting a small business.
The real challenge lies in telling the difference between good debt and bad debt, and knowing when borrowing can support your long-term goals versus when it becomes a financial burden. In Singapore, where housing, education, and lifestyle costs continue to climb, this distinction is more important than ever.
Let’s explore how you can recognise good and bad debt, what it looks like in daily life here, and how to make smarter borrowing decisions.
What is Good Debt?
Good debt is borrowing that can help you build wealth, improve your financial standing, or increase your future earning power. In short, it’s the kind of debt that works for you rather than against you.
1. Home Loans
Buying a property is one of the biggest financial commitments Singaporeans make, and most rely on a housing loan to do so. A mortgage for your HDB flat or private property is typically considered good debt—because property values in Singapore tend to hold steady or appreciate over the long term.
For example, an HDB BTO flat purchased at subsidised prices often appreciates once the Minimum Occupation Period (MOP) is over, giving young couples a potential financial boost when they upgrade to a larger unit or sell on the resale market. A bank loan from DBS, OCBC, or UOB at a manageable interest rate can therefore be seen as an investment in stability and future financial growth.
2. Education Loans
Education is another classic example of good debt. Taking a loan to fund a university degree or postgraduate studies can significantly increase your lifetime earning potential. The CPF Education Loan Scheme or bank loans from institutions like Maybank or Standard Chartered can be practical ways to invest in yourself.
A graduate with a professional degree may earn considerably more than someone without one, making the loan worthwhile in the long run—provided repayment is carefully managed.
3. Business Loans
For aspiring entrepreneurs, taking a loan to expand or start a business can also be classified as good debt, provided the business plan is sound. In Singapore, where SMEs form a large part of the economy, banks and government-backed schemes like Enterprise Singapore provide financing that can help businesses grow and generate returns well beyond the cost of borrowing.
What is Bad Debt?
Bad debt, on the other hand, is money borrowed for things that don’t grow in value, don’t generate income, or simply drain your finances through high interest and fees.
1. Credit Card Debt
This is the most common type of bad debt in Singapore. Credit cards are convenient, but when balances are left unpaid, interest rates can hit around 25% per annum—far higher than most personal loans. Using a credit card for daily expenses is fine if you pay it off in full every month, but carrying a balance is a quick way to dig a financial hole.
2. Payday Loans
Although regulated, payday loans or very short-term loans from licensed moneylenders often come with extremely high interest rates and fees. They are meant for urgent, short-term cash flow problems, but relying on them repeatedly can lead to a cycle of borrowing that’s hard to escape.
3. Lifestyle Borrowing
Financing non-essential purchases like luxury bags, gadgets, or overseas holidays on instalment plans may feel rewarding in the short term, but they don’t increase your wealth or earning capacity. When the item’s value drops the moment you buy it, the debt attached to it becomes a liability.
The Grey Areas of Debt
Not all borrowing fits neatly into the “good” or “bad” category. Some loans sit in a grey area, depending on how they’re managed.
Renovation Loans
Renovating your new BTO or resale flat can improve your living space and even add resale value. But overspending on lavish designs or luxury fittings might mean you’re paying for non-essential features that don’t necessarily boost your property’s worth. Moderation is key.
Car Loans
Cars in Singapore are notoriously expensive due to COE (Certificate of Entitlement) costs. For some, a car is essential—especially families with young children or individuals who need it for work. In such cases, a car loan may be a practical necessity. But if it’s purely for convenience or prestige, the hefty monthly repayments and depreciation costs make it closer to bad debt.
How to Tell the Difference: A Simple Framework
So, how can you tell if a loan you’re considering is good or bad? Here are a few guiding questions:
- Does it appreciate or depreciate in value?
A home or education loan often leads to appreciation in value or higher earnings. A luxury handbag, however, loses value the moment you purchase it. - Does it increase your future earning potential?
Borrowing for higher education or business expansion can pay off over time. Using loans for holidays or gadgets usually doesn’t. - What’s the cost of borrowing?
Compare interest rates. A home loan may be just 3–4% per annum, while credit card debt racks up at 25%. High interest usually signals bad debt. - Can you afford the repayments comfortably?
A general rule is to keep your total monthly debt repayments (including mortgage, car, personal loans) below 40% of your monthly income. This is also in line with MAS’s Total Debt Servicing Ratio (TDSR). - Is it a want or a need?
Needs like housing or education often justify loans. Wants like designer goods usually don’t.
Tips for Smarter Borrowing in Singapore
Even good debt can become problematic if it’s not managed well. Here are some tips to borrow smartly:
- Shop Around for the Best Rates
Different banks offer different loan packages. DBS, UOB, and OCBC may have varying interest rates, processing fees, or promotional packages. Always compare before committing.
- Avoid Relying on Credit Cards for Long-Term Borrowing
If you need funds, a personal loan from a bank usually offers lower interest than rolling over credit card balances. Licensed moneylenders should only be considered as a last resort, and always ensure they’re approved by the Ministry of Law.
- Keep an Emergency Fund
Before taking on any debt, make sure you’ve got at least three to six months’ worth of expenses saved. This way, if you lose your job or face an emergency, you won’t immediately fall behind on repayments.
- Understand MAS Regulations
The Monetary Authority of Singapore regulates how much you can borrow, especially for mortgages and car loans. For instance, the TDSR ensures you don’t over-borrow beyond your means. Be aware of these rules—they exist to protect you.
- Think Long-Term, Not Short-Term
Ask yourself: will this loan make my life better five or ten years down the road? If the answer is no, reconsider.
Everyday Scenarios: Good vs Bad Debt in Action
To make this clearer, let’s look at some common Singaporean scenarios:
- Young couple buying a BTO flat: Taking on a mortgage is good debt, as the property is likely to appreciate and provide long-term security.
- Graduate considering postgraduate studies: A student loan is good debt if it boosts earning potential. But taking it on without a clear career plan may turn it into bad debt.
- Professional upgrading home with a $100k renovation: This could be grey area debt—sensible if kept practical, but risky if overspending on luxury finishes.
- Individual relying on credit cards for daily expenses: This is classic bad debt, especially if balances aren’t repaid in full each month.
- Family debating a car purchase: Necessary for some, but often an expensive form of debt that doesn’t build wealth.
Conclusion: Borrowing as a Tool, Not a Trap
Debt doesn’t have to be a dirty word. In Singapore, borrowing is practically unavoidable—whether it’s for housing, education, or even day-to-day conveniences. The key lies in recognising the difference between good and bad debt, and making sure your loans are aligned with your long-term goals rather than short-term desires.
Good debt helps you grow. Bad debt holds you back. Grey area debt demands discipline. By asking the right questions, comparing your options, and staying within your means, you can ensure that debt becomes a stepping stone rather than a stumbling block.
At the end of the day, borrowing is simply a tool. Use it wisely, and it can open doors to opportunities you might never have had otherwise. Misuse it, and it can close doors just as quickly. The choice is yours.