Understanding the Difference: Good vs. Bad Debt

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Experts would tell you that not all debt are bad and that is correct. Though most debts bring more harm than good, it’s all about what type of debt you borrowed and how you use the money. Going on a shopping spree using your credit card, for example, would constitute a bad debt especially if you’re spending above your spends. Taking a loan, on one hand, to purchase a car or invest in a major investment may be considered good debt in the long run.

In the end, how your debt will affect your life and financial circumstances will depend on how you manage the money. And in case you’re wondering if you’re stuck with good or bad debt, we have here a quick guide to tell you the difference between the two.

Good Debt

Good debt, at its simplest, is the kind of debt that will leave you better off after the debt has been paid off. It’s not so much as debt but a smart investment for the future that will positively impact your finances. With good debt, you don’t simply borrow money just because you can. Good debt involves a thorough, strategic plan where you find financial products with the lowest or cheapest interest rates.

If you’re planning to borrow money, here are some examples of good debt that are worth looking at:

  1. Mortgage – One of the most common debt people acquire at some point or another is a mortgage loan. It’s not always good debt but it can be with careful planning. If you think you’re financially ready to buy your first off, getting a mortgage loan is a smart move. Though it takes to pay off, it’s a smart investment as soon as paid off because your home now becomes an asset.
  2. Car loan – Like with buying a home, a car loan is also an investment granted that you’re buying a car you can afford. Getting a loan to buy a sports car that’s out of your budget is obviously a bad debt.
  3. Student loan – A student loan is another type of good debt. It can be costly but the end game is you having a diploma allowing you to pursue a well-paying career in the end.
  4. Business investment – If you’re planning to borrow capital for a business venture, that’s another type of good debt you’re getting into. But make sure you have a solid and realistic plan to guarantee that your debt will pay off in the long run.

 

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Bad Debt

As opposed to good debt, bad debt will only cause you more financial woes than you can handle. Bad debt will not only drain you financially but also emotionally and mentally. In some cases, it can get to a point that even your relationships are gravely affected. Examples of bad debt include:

  1. Credit cards – No matter how you try to justify it, there’s no denying that credit cards with their steep interest rates are the worst kinds of debt. Even if you pay it in full, credit cards remain a very costly kind of debt you should avoid by all means.
  2. Luxury cars – If you’re buying a car or even other investments that our out of your budget, you’re incurring bad debt. It’s really as simple as that in most cases.
  3. Clothes, consumables, bills etc. – If you’re borrowing money to pay bills or buy clothes and other necessities then you’re acquiring bad debt. These necessities shouldn’t be bought with money you borrowed in the first place. Your monthly income should be able to cover these expenses.