Types of Debts: Difference Between Good Debt And Bad Debt

Debt is something most of us try to avoid but some people don’t know that there are two kinds of debt, one of the them is something we should really avoid while the other can be very beneficial to our financial life, so we need to get it. The former is what we called bad debt, and the latter is considered as a good debt.

What is a Bad Debt?

As said above, bad debt is a kind of debt that every one of us should avoid. Bad debt is incurred by a person when he or she buys something that will certainly lose its value and will not generate any income for him or her in the future. Some of the things that are considered as bad debts are the following:ways on how to get out of debt and bad debt and good debt

  • Getting yourself a car
    Unless that car is use for business and it can generate any money for you, getting yourself a car is considered as bad debt. Anyways, you still have the option to get a used car that is way cheaper and could still work the same as a brand new one, so that you could minimize you loss.
  • Payday loans or cash-advance loans
    This one is the worst bad debt that you could ever get, because the interest rates on this kind of loan is pretty high. You’re better off waiting your next payday to come than to get this one. You could also learn how to budget the right way, so you wouldn’t need to get payday loans ever again.
  • Items you bought on impulse
    You know that this would be included in this list, right? Buying on impulse will never do any good for you, ever, so you might as well avoid doing that one.
  • Things you can’t really pay for
    This one is pretty obvious, if you know yourself that you couldn’t afford something you want, then you should not get a loan or borrow money just to buy it. That’s not a very smart thing to do; you know what you should do? You should learn to save your money and invest. If you do those, I’m sure there would come a day that you could buy that thing.

What is a Good Debt?

Good debt is the complete opposite of bad debt because this kind of debt helps you earn money and could lead you to a better financial life. To help you understand good debt, here are some examples of good debt that you could try to get:

  • Student loans
    Not all loans are bad, a student loan is good because it helps you get into college. And college graduates are known to earn higher salaries than high school graduates. You don’t only raise your future income if you go to college but also the opportunities that you could get after you graduate.
  • Mortgage/Home loans
    Just like student loans, home loans are good for you too. Though, home loans are generally long-term loans, it’s still a good debt to have because you’ll be getting yourself a house, which normally increases in value over time.
  • Getting yourself a car
    I know that I already said this one, but getting yourself a car can also mean you could save more time and help you be more productive. So, buying a car can be a good debt or a bad debt, depending on how you use it.
  • Business loans
    This one is a pretty good example of good debt because you’ll be able to start something that could help you increase your income and if the business you will start can be successful, you’re surely going to live a better life than you have now.

I hope that helps you understand the difference between good debt and bad debt, so what are some of the debts that you accumulated in the past? Do the good debts outnumber the bad debts that you have?

Other great articles related to debt:

The Benefits of Paying Off Student Loan Debt EarlyMaking Sense of Cents

Tips For Paying Down Your Mortgage Quickly–  Life And My Finances

A Success Story Of Fighting Against DebtOne Cent At A Time

Factual Advantages and Disadvantages of Personal LoansMonster Piggy Bank

 

Photo Courtesy of Alan Cleaver
About the Author

Hello! My name is Mark and I'm the one responsible for this website. I'm just a person with enough knowledge about finance-related stuffs. You can know more about me by liking my Facebook Page, following me on Twitter or by adding me in one of your circles on Google+.

Comments

  1. Thanks for the mention Mark!

  2. I don’t think there’s any good debt. In my view, loans are bad no matter what the reason. Sure, there’s a difference between a mortgage and wasting money on crap clothing,but at the end of the day you’re still owing money, whether you bought on impulse or needed a home.

    Ideally we should be able to save money and try to solve most of our problems without having to take loans. Sure, this is just the ideal though, sometimes a loan is needed

  3. I hate the terms good and bad debt. It leads people to believe that if it is good debt, then they can have any amount of it since it’s a good thing. That is why so many college grads have so much student loan debt. They think that since it’s good debt, it’s OK to have it. Then when they graduate and are floored by the $450 monthly payment, the good debt has become a burden. I think we need to come up with new terms to describe debt.

    Debt is debt. The key with “good” debt is to make sure you don’t go overboard with it.

  4. I think there is no good or bad debt and ideally we should go through life without one. But that is not really the case for most. But I do understand what you mean that a “good” debt is something that goes to a meaningful cause and will one day either improve your life and well-being.

  5. Any debt that is done without much thought and used on items to impress people is a bad debt. A car and quick loans can be good debts if used in a business that would generate income to pay off the debt immediately.

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