For many Filipinos, debt is often viewed as something to avoid at all costs. We grow up hearing warnings about having utang and the problems – and stress – it brings. While these concerns are valid, reality is more nuanced.
Understanding debt
“Debt is borrowed money that you agreed to pay back, usually with interest. Think of it as using tomorrow’s money today,” said Jensen Putra, Head of Lending Products at CIMB Bank Philippines.
He shared that borrowing money isn’t inherently good or bad. What matters is why you are borrowing, how much you are taking on, and whether you have a clear plan to repay it.
Changing the way we think about debt
In the Philippines, there is a stigma around debt in general. A study showed that many Filipinos associate debt with poor money management or living beyond one’s means. While excessive or irresponsible borrowing can certainly create problems, avoiding debt altogether may also mean missing opportunities that can improve your financial future.
“Good” vs. “Bad” debt
“Not all debts are created equal. When used responsibly, borrowing can help you achieve important life goals sooner,” said Putra. “Understanding the difference between good and bad debt can help you make smarter financial decisions and use borrowing as a tool to move forward rather than fall behind.”
What makes debt “good” and “bad”
For Putra, the key is to borrow with a purpose. He explained that good debt is something that helps you build your future and reach your goals, such as helping you generate income or building your net worth. Debts like housing loans, business loans, or education loans are usually considered a good debt as it helps you build wealth over time.
Conversely, he shared that bad debts are ones that move you away from a better future. While it may be easy to place all non-essentials under the “bad” category, Putra explains that more than just the use of the debt, what can make it bad is your potential inability to pay it back.
“For example, there’s nothing wrong with going on a luxury vacation and charging it on your credit card – you can even earn airline miles, points, or cashbacks for that. However, if you will have a hard time repaying what you spent, you may end up paying for high interest rates and penalties while also straining your cash flow for the foreseeable future. This is when your debt can be considered a bad one,” explained Putra.
Determine how much debt you can afford
Credit limits differ per person, but does this mean you should borrow the maximum amount? When determining how much debt you can take on, Putra said to first consider what your productive or “working” age is. If you are still far from retirement, he recommends taking on a maximum of 50% of your monthly income. However, he warns that this should ideally be made up of good debts, like your mortgage or business loans.
Once you approach retirement age, Putra recommends borrowing up to 35% of your monthly income. These loans should ideally be more focused on your investments or passive income opportunities, as your working years are now limited.
To manage loans and repayments as well, he recommends only borrowing from registered lenders only, as they are regulated and will not impose exorbitant interest or fees.
“Debt is a powerful tool to advance one’s life, so don’t think of it as your enemy,” shared Putra. “Remember to always think about why you’re borrowing money and what it could potentially give you in return. The goal is not to avoid debt – it is to make sure that every peso borrowed brings you closer to your financial goals – not further away from them.”
