Consumer debt is at an astonishing $15 trillion in America while federal debt is climbing its way to $30 trillion. It’s hard to believe any good can ever come from owing debt. To an extent, it’s a valid argument.
However, there is such a thing as “good debt” that you can separate from “bad debt”. What qualifies as good and bad debt? Keep reading to learn the differences between these types of debt.
What Makes Debt Bad Debt?
Bad debt is often a depreciating asset that you purchase. This means the money you spend will not go up in value nor will it earn you additional income.
Vehicles are an excellent example. While it is close to impossible to function without a car, buying a car with a loan is often a bad choice.
It makes better financial sense to purchase with cash. This is because when you buy a car, the original worth crumbles as you drive it off the lot.
Insane interest fees associated with the deal only make matters worse. Credit cards and payday loans are also bad debt due to high-interest rates.
You’re better off paying a card in full to avoid paying interest, but most credit card users fail to do this. The typical consumer will buy depreciating goods like clothes and electronics. Those who fail to pay their statement in full are subject to interest fees ranging from 15-30%.
What Makes Debt Good Debt?
Good debt allows you to manage your finances and enhance your wealth. Taking out a student loan to pay for your education and increase your income is a great plan.
Another example of good debt is taking out a 30 year mortgage. Unlike cars, homes tend to increase in value over time or, at the least, remain steady. This is great for homebuyers ready to sell their home.
Homes are always in demand. Even during the COVID pandemic, the average cost for a home rose by over 6%. Getting a line of credit or home equity loan is also another good type of debt. Either method will allow you to secure a loan at a low-interest rate all the while using the equity of your home as collateral.
Small business loans are excellent for those who want to be entrepreneurs. So long as you have the right plan, ambition, savvy, and determination, the investment is a profitable choice.
Managing Finances: The Key between Good Debt and Bad Debt
When you don’t have the funds to make a large purchase on something you want, what do you do? You borrow it. Most people opt to take out a loan.
A major problem with debt is not from borrowing the money. It comes from taking more than you can afford or not being able to pay it back on time and in full.
The type of debt matters too. Good debt improves your life (student or mortgage loans) are it’s something lenders often look at positively. Cars and clothes? Not so much.
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