If you look at your payments each month, the number of dollars you’re spending on debt can intimidate you. Debt can seem to be a pit that you must battle your way out of at times, but not all debt is evil.
We can argue on the fact that no type of debt is good. However, for many families, saving money and taking on loans is the only way to buy valuable big-ticket things like a home. Those types of loans are generally justifiable and beneficial to the individual who takes on the debt. However, there is another side of the picture where people take on debt recklessly. Putting aside some of the debts which are harder to differentiate, most of them are relatively easy to recognize among the two extremes of good and bad.
When a creditor examines a credit report to determine the types of accounts you have, certain debts are treated more favorably than others. If you want to get out of debt, you must first figure out which debts are considered poor and which are considered fine. That way, you can manage your loans and pay off the more serious ones first.
Some of the debts are an opportunity for investment for an individual. “How can anything as terrible as debt be called an investment?” you may wonder. It’s likely that debt is a progressive step if you take it on to buy something that would appreciate in value and add to your better financial wellbeing. Some examples of good debt include
A mortgage is an example of healthy debt. You accumulate wealth in your estate, and the money you put into it can be considered an income. Many people consider renting an apartment to be a waste of money while buying a house allows you to accumulate equity.
However, this type of debt can be detrimental to your financial health as well if you take a huge amount of money to buy things quickly. You may land yourself in hot water, and this debt will become a bad debt.
Loans for students
Student loan debt is another example. This debt increased your earning power, which justifies the need to borrow money. According to the US Department of Education, workers with a bachelor’s degree make about $1 million more over their lifespan than people with just a high school diploma.
However, you should keep the amount of money you borrow to a minimum. You may be able to roll bad debt into a student loan, but don’t borrow more than you need just to get some extra cash. It is an extremely important factor to consider when taking student loans.
If you can find competitive Annual Percentage Rates and the vehicle you buy retains its worth until you repay the loan, car loans can be a decent debt. Using an auto loan to purchase a car could also allow you to pursue better-paying jobs that you would not have considered otherwise due to transportation concerns.
As long as you have a reasonable and realistic business strategy, a loan to help you grow your own business will be a decent debt. If your company succeeds, it will be worth much more than the loan you took out initially.
It is usually a bad debt if you’re investing to buy a depreciating commodity. To put it another way, you shouldn’t go into debt to buy anything that won’t increase in value or produce revenue. You’re still taking on bad loans if you use debt to buy consumable products. It is the kind of debt that leads to a bad financial condition. These include
Credit card debt is usually considered bad debt because of the sheer nature of products that people purchase with the help of credit cards. You should not utilize credit to buy necessities such as clothing or food. If you use a credit card for these kinds of transactions, it should be on purpose: for example, to collect points by ensuring you’ll pay off the whole debt by the due date.
It might be enticing to charge a holiday to your credit card because you believe that taking a break will allow you to be more efficient when you return. And if it has genuine advantages, a holiday would not have appreciable worth.
Loans with high-interest rates
The interest rates on payday loans and other personal loans can be very high. When you factor in the fees you pay to borrow, certain instalment loans may have APRs as high as 400 per cent, according to the Consumer Financial Protection Bureau. It is also an example of bad debt.
Garments and consumables
Clothing is of less worth than half of what customers pay for them. Of course, you need clothing, food, décor, and a variety of other things, but using a high-interest credit card to purchase them isn’t a smart use of debt.
Thus, it is essential to focus on all the good debt and avoid having bad debts. If you happen to have some bad debt, you must pay them off quickly to improve your financial wellbeing. One of the ways is by using your wisdom in making financial decisions.
For example, you may decide to pursue a Master’s degree in order to maximize your earning potential. If you have no other means of paying for your tuition, taking out a student loan might be a good excuse to take on more debt.
Also, you must monitor the amount you are borrowing. The way you spend your money has an impact on whether or not you have a positive or poor debt. It’s important to note that any debt that’s too high or that’s used to buy wants rather than necessities should be prevented.
In a nutshell, the concept of good and bad debt is real. You must understand all the pros and cons of debts before taking up any type of loans in the near future.