Introducing Good Debt vs. Bad Debt
Here we focus on good debt vs. bad debt. Some people would argue that there is no such thing as good debt and that borrowing money should be avoided at all costs. This is only possible for a small number of people because, in reality, most of us can’t make big-ticket purchases like a new car or a house without having to borrow some cash.
This is where the line between good debt vs. bad debt becomes blurred. In this article, we’re going to take a look at the definition of good debt vs. bad debt and we’re going to give you some examples of each.
Put simply, good debt is the term used to describe money that is borrowed to buy items that can help to increase a person’s income or wealth over time. Bad debt, in contrast, is the term given to loans that do not provide any opportunity to increase the borrower’s financial outcome.
Examples of Good Debt
A home equity loan gives homeowners the opportunity to lend money against the equity they have invested in their home. This can be good debt in cases where a person needs to come up with a large sum of money for home repairs or renovations. Why?
Because you’ll be adding to the value of your property and, in time, you’ll be able to raise the asking price when the time comes to sell up. If you’re thinking about taking out a home equity loan, make sure you review a guide on everything you need to know about the top lender rate options.
Since good debt is all about adding value, there’s nothing more valuable than getting a good education. The higher your qualification, the more money you’ll earn and the more opportunities you’ll have. In terms of lending, you’ll have federal and private loans to choose from so be sure to do your research into the best option based on your circumstances.
Examples of Bad Debt
Borrowing money to buy a depreciating asset is never a good idea from a financial point of view. You won’t find a better example of a depreciating asset than a car. In most cases, as soon as a car is driven off the lot, it’s worth less than the original price it was bought for. We’re talking thousands of dollars in some cases. If you need a car and you have to borrow to buy it, always choose a loan with a low interest rate. It’s not ideal but it’s the best option in this situation. So do you understand the concept of good debt vs. bad debt?
There are so many reasons why credit cards fall into this category. To start with, most cards come with double-digit interest rates so you should never put big-ticket purchases such as education or medical debt on your credit cards. Secondly, the minimum payments are usually so low that it could take a person years to pay off their debt, even if it’s not a huge sum of money.
Let’s put this into perspective. Say you owe $8000 on a card and the interest rate is 18%. The minimum monthly payment is just $160, which means that, should you stick to this amount, it will take you almost five years to repay the debt. That time can be halved if you were able to double the monthly repayment to $320 but the minimum amount is a much more attractive option to those who might be tight on cash. Hopefully, you can understand the good debt vs. bad debt concept.