When people think about debt, they often see all of it as being bad. However, there’s probably plenty you may not know when it comes to good debt vs bad debt.
No matter when you’re thinking of borrowing money, it really does pay to be fully informed about your options. There are lots of good debts that could enhance your life as well as bad debts that could cause a lot of problems.
To help you keep your finances in better stead, we’ve set out everything you need to know about good debt vs bad debt. So, read on to learn more or get in touch with our industry experts if you need help to manage your debts better.
What is good debt?
When you think about good debt you should simply think of it as a positive investment. This kind of debt is normally taken on for a specific reason and should improve a person’s financial outlook well into the future.
Most of the time, this kind of debt is taken on in order to make profit at a later date. However, it’s essential that you establish a plan to pay back your debt without missing any payments. Taking on a good debt should mean that there is very little risk attached to it for you. Regardless of this, don’t forget that every debt does carry a risk.
So, what kind of good debts are there and what makes them so appealing? Some popular examples include:
A mortgage is often thought of as being a huge milestone in anyone’s life. This is definitely a good type of debt and one that you should certainly consider taking on. You’ll have a place to call home and it will become one of your biggest financial assets once paid off. As an added bonus, mortgage repayments normally end up far cheaper than renting property.
Investing in your education is one of the best ways to build a better future. For starters, university graduates normally have higher salaries than non-graduates. In addition to this, student loans quite often come with a salary threshold that determines when you pay it back and have some of the lowest interest rates on the market.
Perhaps it’s the right time for you to invest in stocks, bonds, commodities, real estate, forex, and the like. A smart investment plan can help you reap substantial profits in the future or generate an annual dividend. However, it’s critical to remember that with any investment comes a risk. Make sure you seek the advice of qualified professionals before taking on any debt in order to make an investment.
What is bad debt?
If you’re trying to work out what makes a debt bad, simply look at how it’s going to affect you in the long run. Bad debt is often taken on by people who don’t fully consider the future consequences.
Bad debt will often cause a purchase to depreciate in value, carry high interest rates, and generate little or no future income. There’s an obvious trend among bad debt, but some of the most common examples are:
Credit cards can easily become one of the worst types of bad debt that you could face. The key point to remember with credit cards is that the interest rates are often extremely high. Don’t forget that one credit card can be hard enough to handle at the best of times. Having many different ones can cause your monthly repayments to get out of control and lead to significant financial difficulty.
Nothing looks quite as enticing as a shiny new car. With the price tag that normally comes with a new car you’d expect it to be a sound investment. However, cars depreciate in value dramatically from the minute you leave the car lot. So, consider joining a car sharing program, buying second hand or paying for an affordable car lease if you don’t need to drive all year round.
If you’re ever tempted to get a payday loan, then you need to reconsider your options immediately. Payday loans are probably the worst kind of bad debt that you could take on. They are designed to entice vulnerable people to agree to astronomical interest rates. If you miss payments, even once, you could be liable to pay thousands of dollars more than you originally borrowed.
We can help!
So, if you’re tempted to take on any kind of debt, just make sure it’s the good kind instead of the bad. While we’ve covered the main types of good and bad debt, it will take your better judgement to make the right call. However, if you’d like professional advice on good debt vs bad debt, contact our experts now. Or, if you’re having trouble with debt, learn how Debt Busters can help you overcome your financial problems today.