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Understanding the Difference Between Good and Bad Debt

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Understanding the Difference Between Good and Bad Debt
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Debt has an ugly stigma. People think that debt is something that you should never be in. They assume it’s like a bad mark on your record that will leave you financially scarred for the rest of your life. However, that’s only because they don’t quite understand the reason behind debt. Let’s explore why debt can be a good thing and try to change your perception of the word to help your own financial situation.

“Good” Debt

There’s a huge difference between what good and bad debt are. Yes, at the end of the day you’re owing someone money, but the reason you owe them money can completely change your perception of the word.

Let’s start with an example of good debt: student loans. No teenager or young adult is going to be able to cough up the money needed to pay for university or college tuition. It’s an absurd amount of money and you’re going to need to save up years worth of wages before you can even pay for your first year. As a result, we all have to resort to student loans so we can pay for our tuition, hence why it’s an example of good debt.

Good debt, such as a student loan, is like an investment in the future. Mortgages are also considered good debt because it’s virtually impossible for an average worker to pay for a house in a single payment. However, a home is a fundamental thing that we need to own to sustain our lifestyle, hence why it’s considered a good investment and a good reason to get into debt.

Good debt ultimately needs to be paid off just like any other debt. Luckily, there are many ways to get around good debt and because the money is being put towards something useful, there are often ways to help you reduce the interest needed on it or methods to help you pay it off faster. For example, you can refinance your student loan later in life to make it easier to pay off, Check out a Lendkey review if you’re interested in paying off your student loan more easily. In short, you should never forget that debt is debt no matter what the reason is, but just remember that good debt is usually easier to pay off than bad debts.

“Bad” Debt

Speaking of bad debt, let’s end the article by giving a couple of examples of bad debt.

 

  • A luxury car that’s out of your budget – there’s absolutely no point in taking out a loan for a luxury item that you can’t actually afford. It’s not essential to your life, so avoid it.

  • Home renovations you don’t need – home renovations can often be seen as essential purchases, but if you’re renovating a part of your home for your personal gain, then it’s not needed.

  • Taking out a loan to pay bills – you already owe someone money since you have a bill, so why owe someone else money? You’ll just end up paying more to the lender due to interest.

These are the three most common reasons that we accumulate bad debt, so try and avoid them as best as possible and stick to good debt instead.

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