Difference between Good Debt & Bad Debt
There is a big difference between good debt and bad debt. Good debt is something that will eventually help you make money or grow your assets. Bad debt is something that will only cost you money.
What's the Difference Between Good and Bad Debt?
|Used to finance things that will appreciate in value||Used to finance things that can be consumed|
|Can be thought of as an investment||Not thought of as an investment|
|Types of loans include mortgages, student loans, business loans and car loans||Other types of loans include high interest credit card, personal loans from friends or family members, payday loans, car loan (unless you're buying a very cheap car that you'll pay cash for)|
Here are some examples of good debt:
Investment property loans
Investment property loans are good debt because the property will (hopefully) appreciate in value over time, and you can also make money from rental income.
Mortgages are considered good debt because your home is an asset that will typically appreciate in value over time.
Business loans can be good debt if the business is successful. The loan can help you grow your business and make more money.
Read more: Small Business Loans
Car Title loans
Car loan debt can be good debt if you use the car to get to work or school or for business purposes. The loan can help you get around and make money.
Read more: Online Title Loans
Student loans (if used to acquire a degree that will lead to a higher paying job)
Student loans can be good debt if you get a degree that leads to a high-paying job. The loan can help you get the education you need to make a good income.
Here are some examples of bad debt:
Credit card debt (High interest credit card)
Credit card debt is bad debt because it has a high interest rate and you're not using the money to buy something that will appreciate in value.
Personal loans from friends or family members
Personal loans from friends or family members are bad debt because you're not usually paying interest on the loan, and if you can't repay the loan, it could damage your relationship.
Read more: How to Lend Money to Family Members
Payday loans (with high interest rates and fees)
Payday loans are bad debt because they have extremely high interest rates and fees. These loans can trap you in a cycle of debt that is very difficult to escape.
Read more: Payday Advance Loans
Car loan (unless you're buying a very cheap car that you'll pay cash for)
Car loan debt is bad debt unless you're buying a very cheap car that you'll pay cash for. If you're financing a new car, the loan will likely have a higher interest rate than a student loan or mortgage. Additionally, cars depreciate in value very quickly, so you could end up owing more on the loan than the car is worth.
How to Focus on Good Debt and Avoid Bad Debt
Now that you know the difference between good debt and bad debt, you can make better financial decisions about what to borrow for. Here are some tips:
1. When you're considering taking out a loan, think about whether the item you're buying will appreciate in value or not. If it will, it's probably good debt. If it won't, it's probably bad debt.
2. Consider the interest rate of the loan. The lower the interest rate, the better.
3. If you're not sure whether a loan is good debt or bad debt, ask someone you trust for their opinion.
4. Avoid taking on too much debt. You don't want to be in a situation where you can't make your loan payments.
5. If you have bad debt, work on paying it off as quickly as possible. The sooner you get rid of it, the better.
Read more: Choosing a Debt Payoff Strategy
In general, you want to avoid bad debt and try to only take on good debt. However, there is such a thing as too much debt, even if it is good debt. You don't want to be so leveraged that one bad thing could ruin you financially. So, use debt wisely and carefully. Know the difference between good and bad debt, and always try to keep your debt levels under control.