Good Debt vs Bad Debt

Funnily enough, it is common to hear that all debt is bad debt, but that really could not be further from the truth. Borrowing money and taking on more debt is one of the only ways for some people to be able to afford to purchase larger items such as houses or cars. There is a substantial difference between taking on justifiable loans and careless spending.

Loans should be justifiable and bring good value to the person deciding to take on the debt, but some people tend to take on debt due to careless spending on their credit card. For some people, it is fairly easy to differentiate between the two extremes, however, when it comes to determining good or bad debt, you will often need a deeper analysis.

To put it into perspective, let’s look at a few things.

Bad Debt

In basic terms, if something is going to put you into debt and it doesn’t generate income or go up in value, it is likely bad debt. Good debt has the potential to completely increase a person’s net worth, whereas bad debt can have quite the opposite effect. Some well-known items that will attribute to bad debt are:

• Clothes, Consumables, and other goods/services– It is often said that clothes are worth less than half of what you pay to purchase them from your store of choice, and as it turns out, that is likely true. For example, you will see how generous that statement actually is by simply looking around a used clothes store. Food, fuel/gas, vacations, and fast food are also among things that are commonly purchased with borrowed money.

• Cars- Cars cost a whole lot of money, especially brand-new ones. There is no doubt that you need a car to run errands, get yourself to work, and complete day to day tasks, but paying interest on a car purchase is not only unnecessary but also a complete waste of money. It is said that by the time you leave the car yard, your car is already worth less than what you purchased it for. 

• Credit cards- We all know this one. Credit cards are known as one of the worst forms of debt you could possibly have. Interest rates for a credit card are substantially larger than those that would be attracted with a consumer loan and the payment schedules are largely arranged to completely maximize costs for the consumer. 

Good Debt

It does take money to make money, and that is where we begin to talk about good debt. If the debt you decide to take on generates any form of income or will increase your net worth, then you have good debt! That can be considered a huge positive.

Consolidation Loans –

If you have found yourself in a pile of bad debt, a consolidation loan can be considered good debt if it helps you climb out of the debt rubble. Merging all your high-interest debt into one lower interest consolidation loan can help you pay off principal debt faster. For a consolidation loan to be worthwhile, it needs to offer a low APR much lower than your current loans and credit cards. Another upside to a consolidation loan is that it simplifies your debt load. Rather than multiple payments, you can now focus on one. Find a low APR loan at financer.com.

Here are some of the more notable things that are worth going into debt for:

• Real estate/homeownership– The ways to make money in real estate are never-ending. Speaking on the residential front, one of the simplest strategies is simply to purchase a house, live in it for a few decades, and then sell it at a profit. Residential real estate is also a marvellous way to attract income by finding a boarder or renting out your entire residence. For investors, commercial real estate is a great way to source some more cash flow and capital gains.

• Technical/College Education– Generally speaking, education can take you a lot of places and a lot of the time it will even increase your income. When a person is highly educated, there is huge potential for them to earn plenty of money which is, of course, a drawcard. When workers are well-educated, it often lands them in better-paying and more solid jobs, so the education does eventually pay for itself.

• Small business– For most people, earning money is enough of an initiative to begin their very own small business and being their own boss is the cherry on top. With luck, hard work, and passion, you can turn your little business into a well earning enterprise that could eventuate into becoming major wealth. This can come with risk, but if you enter into a field you are passionate and knowledgeable about, the guarantee for success is far higher.