There is surely an argument that any debt is bad debt, but borrowing money and taking on debt is a thing many people do to purchase big items like homes and cars. Determining whether or not a debt is good or bad often involves a thorough analysis of specific circumstances.
While good debt has the potential to increase a person’s net worth, it’s considered to be bad debt if you are borrowing money to spend on something that will decrease in value.
Cars- While you need a vehicle to get yourself to work and to run errands, paying interest on a car is simply a waste of money. The vehicle is already worth less than when you bought it as soon as you leave the car lot. If you can pay cash for a used car if you can’t take out a loan to buy the least expensive reliable vehicle you can.
Credit cards- are one of the worst forms of bad debt. The interest rates charged are frequently significantly higher than the rates on customer loans. Also, credit cards aren’t used to purchase appreciating assets.
Good debt is an investment that can grow in value or generate long term income. Good debt can also be low-interest debt.
Real Estate- There is a variety of ways to make money in real estate. One example involves buying a house and living in it for a few years and then selling it for profit. Although real estate debt is risky there are many benefits to gain if you do it the right way.
College education- Education has a positive correlation with the ability to find employment. Better educated workers are likely to be employed in good-paying jobs and tend to have an easier time finding new opportunities. Although, if there is no career path or little income to be earned from your degree, student loans can quickly turn into bad debt.
Determining if debt is good or bad usually depends on an individual’s financial situation, as well as many other factors. Good debt allows you to manage your finances more effectively and to leverage your wealth. Bad debt decreases in value after you buy it, unfortunately, that is many of life’s basic needs.
For more information on tackling debt and improving your financial wellness, contact one of our team members today.