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The Difference Between Good Debt And Bad Debt

Good Debt and Bad Debt (1)

The Difference Between Good Debt And Bad Debt

Debt is the leading cause of stress amongst a lot of people. Most people find themselves buried in large amounts of debt before they even know it. Debt has become such stress amongst a lot of individuals that some people no longer understand that debt is not supposed to stress you out. Some forms of debt should have to help you turn your life around and boost you financially. There is a clear difference between good debt and bad debt and if you don’t know it sooner, you’ll find yourself swimming in the latter.

The difference between bad debt and good debt is as simple as, if the debt increases your net worth then it’s good debt and if it doesn’t and you don’t have money to pay it off, it’s bad debt. Your debt to income ratio also determines whether you are in good debt or bad debt. A debt to income ratio 43% and above often represents bad credit and can taint your reputation to lenders. Before you can take out new debt, lenders check your credit history and if it’s not looking good you may not be accepted for the loan.

Examples of Good Debt

Good debt is any credit that sets you forward financially. With good debt, you can manage your finances, buy things and handle emergencies. Sometimes the debt may feel like it’s a lot, but it pays off in the long run. Examples of good debt are:

1. Mortgage

A mortgage loan is literally the best debt you can take out. Taking out a mortgage allows you to be a homeowner, increasing your net worth. House prices always increase exponentially and you’re better off owning property for the long run. So yes, mortgage debt is totally worth it.

2. Student Loans

Student loans help you invest in your future. Imagine failing to go to school and becoming something better. With student loans, you can get a good education and land a well- paying career in the future.

3. Business Loans

A business loan is more like an investment, it will always pay off with the right planning. Although a small business loan is risky, it can pay off fast and have you paying off the debt in no time.

Examples Of Bad Debt

Bad debt is that does not add value to your life and is usually hard for you to pay off. Unfortunately, this entails most of your daily need like games, clothes, and cars. The key to maintaining good debt is staying away from things you can’t afford. Examples of bad debt are:

1. Credit Cards

Most people who find themselves unable to pay off debt are usually in credit card debt. Credit card debt has high interest and is considered bad credit. If you cannot afford something with cash, using a card to get it is never the best idea. Credit card loans are also detrimental to your credit score.

2. Automobile Loans

Automobile loans are considered bad credit because most of the cars you buy are not worth very much. If you take out a loan to buy a car, it doesn’t necessarily add up to your value because unlike houses, cars depreciate in value instead of increasing.

In summary, before taking out any loan. Ask your self if it’s going to be good debt or bad debt. Good debt is not as difficult to pay off as bad credit and often benefits your financial status. Bad debt brings you down.

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