Almost everyone has acquired debt at least once in a lifetime. Some make use of credit cards for their everyday expenses. Others opt for loans when emergencies arise. Even if no one likes paying for the interest fees, sometimes it becomes inevitable.
When the need arises, and you have no enough extra funds, one will have no choice but to take on debt to make ends meet. While it is true that all debts can lead to financial struggles, there are times when it can fulfill some of your needs and wants.
The following are some examples of good and bad debts.
Good Debt: Home Loans
These days, it can be hard to acquire the exact amount of cash needed to buy a house. This is why many are still renting or living with their families. However, thanks to the many home loan options, you can now make a more affordable home purchase.
Since real estate is generally a good investment, taking in a home loan can help give you stability and security. If you’re not sure if applying for a home loan is for you, then you can check this housing loan guide.
Bad Debt: Payday Loans
Payday loans are considered bad debts, even if it can help you pay for your expenses. Although they are small-dollar loans, they tend to be among the most expensive debts due to their high-interest fees. If you’re living from paycheck-to-paycheck, you’ll soon find yourself in out of wage.
This is since you’ll be paying for the loan on the very next paycheck. If you use up most of your salary on the next payday, you’ll end up with nothing which means the cycle will just continue.
Good Debt: Student Loans
If you acquired a loan so you can finish school or acquire higher education, then this is considered as good debt. The higher your education, the better the chances of you getting a job that pays higher than those without a good education.
You get the chance to live a better life, pay off your debts and start earning and saving more cash in the process.
Bad Debt: Car Loans
There are split opinions when it comes to auto loans. It will usually depend on your reason for acquiring the car loan and the type of vehicle you choose. If you’re investing in a vehicle to support your business, then one can consider it as good debt.
Are you buying a car to get to work? If you bought one that is way above your means, then you could end with an item that depreciates fast and won’t help you financially in the future. Take note that a car is generally an asset, not an investment.
Good Debt: Business Loans
If you’re a business owner wanting to start growing your brand, then you can apply for a business loan. Business loans are generally good debt as it can help you increase your profit and improve your business. One can treat this as an investment since it allows you to acquire more money in the future.
In a nutshell, debts can be good only if you are using one to invest in your future. Bad debts, on the other hand, are making use of the money you don’t have yet just to fund unnecessary wants that also depreciate in value.
So, before you take on that loan, think twice first. Will it be a bad debt? Or is it one investment you can take advantage of?