The Difference Between Good and Bad Debt

You’ve probably been told by everyone you’ve ever met (outside of this article) that debt is a bad thing. Debt it something you avoid because no one wants to owe another person or company money. Interest rates will go up, you’ll be charged a ludicrous amount of money and you’ll find it difficult to breathe financially. It’s no secret that debt can turn your life into a living hell and dig you into a hole that is difficult to climb out of, but there are many ways to turn your life around so you can make positive use of debt.

To start with, let’s compare the two types of debt to give you a better understanding of the differences between good and bad debt.

Debt is seen as a nuisance, but good debt can be a positive thing.

Examples of Bad Debt

To start with, let’s take a look at some examples of bad debt. Bad debt is typically characterised by personal need and greed as opposed to necessary items or services. Bad debt also doesn’t have a good reputation of being an investment, and the money is seen as wasted because you don’t often see a return on it. Bad debt is the sort of debt that will drain your money and provide nothing useful.

  • Using a loan to pay off another loan. It’s foolish to get into debt just to pay off another debt. The only time you would do this is if you were to consolidate all of your debts into a single monthly repayment.
  • Luxuries that you can’t actually afford. Want to buy the latest phone, the newest laptop or the fanciest clothes? Unless you can actually afford these items with your salary, don’t bother taking out a loan to buy something you can’t afford with good budgeting.
  • Getting an advance on your salary. If you’re living from paycheck to paycheck, then getting a loan that you plan to pay for when you get your salary is a foolish idea. If you’re seriously lacking funds to make it through the rest of the working week or month, then you might need to budget better.
  • Buying expensive items you don’t need. If you’re constantly buying things you don’t need and taking out loans in order to afford them, then you should stop and realise that it’s your money you’re putting on the line and you will need to pay it back.

Examples of Good Debt

Good debt is the kind of debt that you almost always see a return on. It could be paying for a service or item that will you get a lot of use of, or it could be debt that will open up different paths in life.

  • Starting your very own company. Starting your own company is a great way to use a loan because it promises a return in the future. The success rate does depend on the staff you hire.
  • Paying for a house that you can eventually afford. Mortgages are some of the most common types of debt you can get into.
  • Purchasing much-needed items that enhance your life. It could be a new computer, a microwave or even a desk. If the item serves some use and you need to purchase it with a loan, then don’t feel bad if the item will see regular use.
  • Student loans. Most people end up paying for their student loans at some point in life. If you want to get a better education or provide one for your kids, then accepting these student payments is a normal part of life.

Finding the Right Places to Borrow Money

It’s important to find the right place to get a loan if you want to borrow money. For instance, a secured loan direct lender will be ideal for most people because it’s quick and simple. There are plenty of other options, such as putting your car or home in the line. The idea is to look for the right interest rates so that you don’t end up spending too much money. If you currently have a poor credit history, then you may need to look for alternatives such as a bad credit lender.

For many people, debt is something they should avoid at all costs. However, unless you were born into a wealthy family, debt is the natural way to afford expensive goods and services such as a car, education and even your home.

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