Good Debt vs. Bad Debt: What’s the Difference?

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Some people will argue that all debt is bad, however, there are many situations where debt is not only justifiable, it is advisable. However, people often take on unnecessary debt that could have been avoided very easily. 

There are many different types of debt plans that people jump into without knowing enough about them, which can cause financial strain in the future. Thus, it is important that you know the difference between good and bad debt. This article will help you get a better understanding of different types of debts and how they affect your financial health in the long run. 

Good debt

  • Mortgage

Taking out a mortgage and buying a house is a long-term investment. As such, you may need to spend some long nights researching offers and plugging numbers into an online mortgage affordability calculator. After all, not only do you live in that house for a few decades, but it also increases in value every day. Plus you can sell it at a profit after a few decades if you want to. In the meantime, you get to enjoy the privileges of owning a house of your own. 

  • Student loan

By taking a student loan you invest in yourself and increase your earning potential in the future. The more educated you are the more likely you are to land a high-paying job, plus a good college degree will pay for itself in a few years. However, make sure you acquire a degree that has the most promising long-term prospects for you. 

  • Business loan

No one ever got rich living paycheck to paycheck. If you want to make some real money you need to start your own business. Once you have a small business idea that you believe in, you should try to get a business loan. Even though many small businesses fail in the first two years, if you have ambition and direction taking a business loan might end up being the best decision of your life. 

Bad debt

  • Credit cards 

Credit cards ruin your financial health. They have high interest rates which are tough to figure out, which is why people keep using them without caring about how they are going to affect their finances in the long run. Plus it can ruin your credit score which is why it is best to stay away from credit cards as much as you can.

  • Automobile loan

The reason why an automobile loan is considered bad debt is that an automobile doesn’t increase in value with time, in fact, it drops in value the more you drive it. Although automobile loans aren’t as bad as credit cards because they don’t have high interest rates, they still hurt your financial health in the long run. 

  • Payday loan

Payday loans are ten times worse than credit cards. They give you some cash in the short term to get through tough times and in return, you postdate a check that you are supposed to pay with your next paycheck. However, these loans often have interest rates as high as 300% which means you won’t be able to pay them back and keep accruing more debt every month. 

Conclusion:

After reading this article you know the difference between good and bad debt and how it affects your future. Now you need to be very careful to not get yourself under debt that will hurt your financial future and only take on debt that is providing value in the long run rather than becoming a liability. 

Molimishra

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