Good Debt vs Bad Debt

Most people try to avoid matters that have to do with debt. However, taking a loan is used by many corporations and individuals as a method of making large purchases that they cannot not afford under normal circumstances. Debt is an amount of money borrowed by one party from another. 

There are certain arguments that no debt is good, experts have agreed that there are good and bad debts. Determining whether a debt is good or bad, depends on the organization’s financial status, the purpose of the loan and other factors.1

Now that we have established that there are good and bad debts, what makes taking a loan good or bad; according to experts, good debt is a loan that has the potential to increase your net worth.

You incur them for something that’s likely to appreciate, such as for your home or business.2

To make sure, you are acquiring a good one, have a clear and specific reason for taking on a loan, as well as a realistic plan for paying back the loan. This will allow you to clear it as quickly as possible.

You can also clear it in a series of regular and affordable payments.

Good debt:

This allows you to improve your life, while bad debt can create a never-ending borrowing cycle. It involves borrowing money to purchase depreciating assets. A depreciating asset is one that has a limited effective life and can reasonably be expected to decline in value over the time it is used.3

Bad debts:

These are often tied to items that provide instant gratification and offer little or no long-term value or financial return. 

You incur bad debt primarily to pay for something that you cannot afford out of your income and savings.4  One might even think of it as being convenience related. You want to purchase something, but you’re not willing to save the money, so you turn to credit to make it happen.

Regardless of whether the loan is good or bad, make sure that you are taking a loan for the right reason. 

Also, ensure that you manage your loans efficiently so that you can pay back within the tenor and it doesn’t get overextended.

References

  1. https://www.investopedia.com/articles/pf/12/
  2. https://www.investopedia.com/articles/pf/12/
  3. https://www.ato.gov.au/Forms/Guide-to-depreciating-assets-2019/?page=6
  4. https://www.thesimpledollar.com/financial-wellness/

 

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