Good Debt vs Bad Debt – What’s the difference?

We see so many people getting buried in debt, becoming bankrupt – maybe you’re even one of these people – and then we consider all debt to be bad and that we should avoid it at all costs. However, there are some types of debt which might be good for you to have. So, what’s the difference between good and bad debt? Is there even such a thing as good debt?

What is Good Debt?

It can be defined as the type of debt that will bring value to your life, and potentially make you earn or save more money over time. Keep in mind that for it to be considered good, it also needs to have a low-interest rate and be within your means. For instance, a mortgage for a house is considered a good investment, since properties often increase in value over time. And also if you’re considering to start investing in real estate, it’s not advised to buy the house in cash because of the loss of liquidity, since the majority of the money will be tied up. We can also consider student loans as good debt since it can open up opportunities to advance in your career and earn a great salary. Other examples are business loans or expenses if you have a plan to make it thrive. 

What is Bad Debt? 

Bad debt can be defined as the ones that make you poorer, can’t be considered as an investment and will likely not pay for themselves in the future. They also have high-interest rates.  Among them are store credit, car loans, and high-interest credit cards. A fancy holiday is also a bad idea if it will make you be in the red for months. It is only a good idea to acquire bad debt if you are certain you will pay it off and already have an emergency fund. If you want to make a big purchase, you should plan for it. 

Conclusion

When getting new credit, it is crucial to shop around for the best deal and avoid high-interest rates and loans. You should ask yourself if you’re able to afford the monthly payments, and understand the risks associated with the loan. Depending on the terms, you might end up losing your house or car.  If you’re at the stage of being buried in debt, want to pay it off and don’t know where to start, it’s always a good idea to start paying off credit cards, loans and other consumer debts you have.