Discussion Forum Forums Debt Debt actually a good thing

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    Do you know the difference between good debt and bad debt? If not, You should at least know the differences between them. Before taking on them.

    In this post I will provide some examples of good and bad debt and I hope that you will be able to distinguish them after reading this post.

    What is good debt?

    In simple terms, a good debt is investment debt that creates value; for example, student loans and business loans. Good debt should leave you better off in the long-term and should not have a negative impact on your overall financial position.

    Three notable examples of good debt include:

    1. Education

    Taking on student loans to pay for education is actually a good investment because university graduates typically get paid more than non-graduates and, more importantly, the interest rate for student loan are generally lower and most banks allow you to repay the loan after you graduate.

     

    2) Housing

    A housing loan enables you to purchase a home to live in. Once that loan is paid off, that home will be a big financial asset, which is most likely to grow in value over time and the monthly loan payments is much cheaper than renting a flat.

    3. Investing in your own business

    Borrowing money to start or expand a business can also be seen as a good debt, as long as you have a sensible and realistic business plan. If your business does well it will end up being worth far more than the loan you originally took out.

    Note: While good debt may seem like a great idea, it is important to realize that even the best ideas don’t always work out as intended.

     

    What is bad debt?

    In simple terms, Bad debts are those that detrimental your wealth, offer no real prospect of ‘paying for themselves’ in the future unlike good debt.

    Two notable examples of bad debt include:

    1) A luxury holiday you can’t afford

    After a year of hard work of working for others. Many of us dreamed of going on a long luxury holiday.

    Well, generally there is nothing wrong with it, but if it requires you to take on the loan before you can go for the holiday then maybe you should think about it again.

    2) A brand new car you don’t need.

    You should never take a car loan if possible because

    • Cars depreciate in value quickly – When you borrow money against an asset that depreciates rapidly, you’re simply purging money.
    • Car loans are fairly high interest loans

    Conclusion: Debt can actually be a good thing if one uses it wisely.

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