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:
- 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 Early – Making Sense of Cents
Tips For Paying Down Your Mortgage Quickly– Life And My Finances
A Success Story Of Fighting Against Debt – One Cent At A Time
Factual Advantages and Disadvantages of Personal Loans – Monster Piggy Bank
Photo Courtesy of Alan Cleaver