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What is the difference between good debt and bad debt?

Debts are considered as bad only, but there are some good debts too. The difference that makes debt good or bad depends on its nature. The way a debt leaves impact on the personal finances of its bearer decides the final tag. You should know the difference between the two because, in the long journey of life, you need to make countless financial decisions. The efforts should always be focused to keep less number of bad debts.

Meaning of good debt and bad debt

Meaning explains the concept properly and helps understand the difference too. Here is how both differ in their meaning.

Good debt – A good debt is something that adds in the future investment and does not leave any wrong impact on the financial condition. Such debt helps either making assets, or it gets a bigger profit for the future. Good debts always prove the deal of benefit for the bearer even after paying it off.

Bad debt – A bad debt never adds anything positive in your coming tomorrow. In fact, it only adds stress because such debts are also usually higher in interest rates. They are usually difficult to manage and comparatively more expensive.

Types of good debts and bad debts

The relatable examples can explain better what are good and bad debts and also how do they work. Only the examples will be sufficient to mark the line of dissimilarity between the two. Their impact  on our  life is visible according to their role, and that role describes if they are negative or positive for us.

Good debt – Let us understand the types of good debt first

  • Mortgage – It is most the first example to mention in the good debts because a mortgage helps you attain a big asset for a safer future. The instalments you pay are not a waste of time and money because with every repayment you get closer to the ownership of a property. When you buy a home through a mortgage, the property belongs to you after paying off the whole amount.

You own it and can take double benefit by reselling it after a few years. Even if you don’t, living in a house with no dependence on the landlord is a huge luxury. It saves you millions of money that is required to pay off in paying the rent.

  • Student loans – A student takes a loan for education, and that education helps him/her earn money and make a better career. In this way, a student loan is also a good debt because the purpose for which you use the money is constructive. In short, the used funds help you earn better in the coming days and years.
  • A business investment – Of course, anything invested in the business is for a progressive reason. Money invested in a commercial entity is always for some constructive reason. A merger, business extension, launch of a new product line etc. wherever the funds are invested, they are destined to create more money through profit.

Bad debt – Now comes the gloomy types of debts that are a burden to the finances

  • Personal loans – These loans need no introduction due to their ubiquitous presence across the world. They are quite popular how the purposes that they are borrowed for are usually not constructive. Wedding expenses, medical reasons, buying gifts, funding for weekend trips are some of the common purposes. Such things do not add much in your future.

Personal loans are available in varied names as they are short-term in nature, and every loan with the constraint of purpose is a synonym for personal loans. Instalment loans, quick cash loans etc. are some of the examples.

  • Credit cards – Credit cards AS WELL ALL KNOW are like an enemy in the disguise of a friend if not used smartly. The high-interest rates make them challenging to handle, especially when you miss the instalments. We use credit cards for daily expenses that generally have nothing to do with our future progress.

Financial advisors always suggest people avoid the frequent use of credit cards. You need to follow two rules while using them 1) Do not use for every small expense 2) Do not keep multiple credit cards.

  • Car loan – Some people take as good debt, and some take it as a bad debt. But actually, it is the latter one. When you buy a car, it makes an asset, but it does not increase in its value with time because of the depreciation factor. You can resale a house at higher prices even if it gets old, but you can never sell a second-hand car at a higher price. It means a car loan is bad debt, hence proved!
  • Borrowing money to pay bills etc. – Sometimes mess happens, and we fail to manage the expenses properly. In that case, borrowing funds become essential. The poor credit people usually face such situation because when they miss payments, the debt increases and finally they have to take poor credit loans. The installment loans for bad credit offered by the direct lenders only with no guarantor obligation present a suitable example.

It is like someone is borrowing funds to pay the bills such as electricity or internet bill. Do these things help in making a better future? No! Never! Similarly, expensive payday loans are considered bad debts. They are obtained for emergency conditions and have less to do with any constructive purpose.

Now you can understand the difference between the good debt and the bad debt and also their role in personal and financial life. Bad debts are difficult to avoid as they fulfil short-term needs. However, you should also keep working on handling them properly. It becomes even more important for the bad credit people to keep an eye on their debt bucket. However, the options such as debt consolidation loans for bad credit people by direct lender is always a better choice. Merge all obligations and have one instalment on a fixed and lower rate. But the actual effort should be to avoid bad debt.

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