If there is one topic that always gets people uncomfortable, it seems to be the topic of debt. Whenever you take out a loan or borrow money from another entity, you are considered to be indebted to them until you pay back the full amount. While many associate debt with a negative context, and rightfully so, there are actually different kinds of debt, and there are forms of debt that can actually be good. Here are the distinctions between good kinds of debt and bad kinds.
Good Debt
Good debt sounds like an oxymoron, but once you understand what this kind of debt is, you will see that there is value in owing money for certain purposes. Basically, good debt is a form of debt that will generate value over the long term. The most common example of good debt is student loan debt. Why?
If you graduate, you will earn a degree and go into a career where you will (hopefully) increase your value as an employee and raise your future value and net worth. In addition, student loan debt tends to have lower interest rates compared to other kinds of debt.
Another kind of debt that is considered to be good is a mortgage. Mortgages tend to have lower interest rates as well, and that interest rate is also tax deductible. Mortgages are a long-term investment, which is typically expected to take 30 or so years. However, since the mortgage is paid over a series of decades, this allows for lower monthly payments and frees up money for emergency situations and other potential investment ventures.
Ideally, what you would want to happen in this situation is to have the home’s market value increase over time so that the interest that accumulates cancels out and you end up with a profit.
Another form of good debt is an auto loan, but only if the vehicle is very important to conducting business. However, unlike a house, a car doesn’t increase in value over time. That is why it is imperative to have as much money as possible to pay as much up front as you can so that you can avoid high-interest monthly payments.
In addition, any debt that has a low interest rate and is used to secure funds for a profitable purpose is good debt, such as home equity loans. In these cases, however, you should wisely consider if you can make certain payments. This is where you may want to consider debt consolidation loans, and industry experts such as Brice Capital can assist in this regard.
To summarize, good debt is a form of debt in which you either pay low interest rates or can expect an increase in value as time progresses. However, there is also a bad form of debt that you want to avoid.
Bad Debt
Bad debt is a form of debt in which you make investments in things that lose their value quickly and do not generate you any income in the long term. Unlike good debt, bad debts also typically carry high interest rates.
The most common type of bad debt is credit card debt. This is where being financially responsible proves to be very important. When handling a credit card, a general rule of thumb is that you should never spend more than you can afford and to strictly live within your means.
Some of the worst kinds of debt that you want to avoid include cash advance or payday loans. This is where the borrower writes a check to the lender in the amount they want to borrow with a fee added. Then, you have until the next payment cycle to pay back the loan amount with the fee and additional interest added on top of it. The interest rates for these kinds of loans can be gargantuan, with some starting at 300%. If you fail to pay back the loan by the next deadline, you will have another fee added on top of it.
Therefore, you will want to avoid loans taken out for the sake of convenience. You generally want to avoid loans as much as possible so you do not get yourself into debt that will impact your life. However, debt consolidation loans from industry experts such as Brice Capital can help alleviate some of these issues.
As you can see, debt comes in many shapes and forms. While debt is another fun thing to talk about, there are forms of debt that will grant you long term value. Always aim for the kind of debt that will benefit you in the long term. Ideally, you will want to avoid debt altogether, but if you must, refrain from taking out loans for items that will lose their value quickly.