For most of us, debt has become a part of our life. Nobody likes to pay those interests incurred on debts, but saving enough money for large purchases is not always feasible. And sometimes it is not a financially wise decision.
So, probably everyone has to take debt at some time in their life, how can you decide whether it is worth or not? How would you know if the interest is worth the benefits?
Good debt makes your financial situation better while a bad debt can harm it. And how you are going to use the money makes it very clear.
Hence, before you take any debt, such as personal loans, it is essential to know the difference between good and bad debt. Something is worthy of taking a loan while others can put you in a financial mess. Here in this article, we will go through the details about it.
Does Good Debt Exist in Reality?
It is a well-known proverb that ‘no debt is good debt’. But there are few situations in life where taking a loan can be very helpful. We will go through each one by one.
- Student Loans: Borrowing money for study purpose is the right investment choice as it helps you in getting a university degree. And a university graduate gets more salary than non-graduates. Also, the interest rate on a student loan is comparatively low compared to others, and you have to pay the amount only after finishing your studies and earning a certain amount. Hence, considering all these factors, we can say that student loans can be termed as good debt.
- Mortgage: A mortgage can be classified as good debt because it allows you to buy a home to live in. Everybody needs a home where they can live. Once you repay the mortgage, that home will be a significant financial asset for you. And as we know the value of such assets keeps increasing day by day and over time the value of your house will be more than the mortgage you had paid. Also, owing your own home is better than paying rent. It gives you security and self-satisfaction.
- Loans For Business: A loan to either establish a new business or expanding your current company can be categorised as good debt. If your business is doing well and you are making profits, then taking a loan is worth it. You need to have a good and realistic business plan.
- Investment: Good debt can also be about investing in shares and stock market as these are high dividend market which can improve your wealth in a short time. However, there is a risk involved in it. You have to be an expert in the stock market to excel in this.
Thus, we can say that student loans, mortgage, and loans for business can be considered the most common form of good debt. But even a good debt has its perils.
So, before taking out any loan, it is always a wise move to consider what you are going to get in return. How would you manage your life in debt? These things have to figure out first.
As discussed above, bad debts are those that harm you financially and are not affordable. You take loans to spend more today, which is not a good practice. For example, taking a loan to buy a luxurious car that is not needed currently is bad debt.
If the debt won’t help you in making wealth in the future or generate income but fulfils your present lifestyle needs, it is bad debt.
Here are a few examples which you should seriously consider before borrowing:
- Luxury Vacation: We all dream of going to an exotic location for a vacation, but if it comes at the cost of debt, then it is better to avoid it. Instead of taking out a loan, try to save money first, and once you have sufficient money; you can go anywhere you want without any burden of debt.
- Buying a Brand New Car: Before purchasing a new and expensive car, first, ask yourself if you need it to buy. Suppose you bought the vehicle with the help of a loan and suddenly you lost your job. What will you do then? How will you pay monthly interest being out of position? You might have to sell your car. That means double trouble for you.
- Taking Loans to Pay Credit Card Bills: A credit card is a form of bad debt. Sometimes people purchase unnecessary things out of impulsion, and later they find it difficult to pay the bill and get into debt. Hence, you should be careful about the usages of the credit card to avoid any trouble.
In conclusion, we can say that you have to make a conscious decision while taking out any loan because it is going to have an impact on your future. The right kind of debt can help you while the wrong one can destroy your financial life. So, you should always be careful while getting a mortgage.