People associate debt with being bad for one’s life, but that might not be true. Not every debt ruins one’s life. In fact, some debts might be beneficial and help you transform your life for the better. So, knowing the difference between good and bad debts is mandatory. Knowing the difference will help you manage your debt, and when the time comes, choose the correct option.
This short but precise article will guide you on distinguishing a loan as good or bad before applying. The right decision at the right time saves borrowers from falling into a financial trap.
Understanding the Difference between Good and Bad Debt
While understanding good and bad debt, we must see what features make a debt fall into a particular category.
While talking about good debt, one has to understand that it’s a loan that helps increase your wealth or adds to the value of your asset. So, by taking money from someone, you make more money. For example, some categories of good debt are house mortgages and taking loans for launching businesses or education purposes.
All these loans add value to your life and help you generate sources of income. However, to keep these loans beneficial, people must manage monthly payments. If you fail to maintain your good debt, it could start harming you.
On the contrary, bad debts don’t add value to your life or assets. They are a financial liability that negatively impacts your worth.
Types of Good and Bad Debts
There are different categories of debt, each having negative or positive effects on your life. Here is a list to identify which loans are acceptable and which ones to avoid.
Good Debts
- Mortgages
Applying for home mortgages is beneficial in every sense. We all know that houses are a valuable asset, and buying them with just your savings is nearly impossible. Therefore, taking a debt is a better option.
Even though it might look like paying back hundreds and thousands of dollars to a bank, you invest in a property that will pay more in the future. Moreover, you could use home equity or earn a significant profit when selling your home.
- Business Loans
You can always consider every small or large business loan as good debt because they help you earn much more than your loan amount. Establishing a business requires investment, but the moment your business takes off, it starts paying back double the amount you invested. An initial financial boost is a must for every business, and the easiest option is to apply for a loan.
- Investing in Properties
Another debt type is taking money for property purchases. It could be a rental property or a piece of land. Investing in such properties is beneficial as they help you earn extra income and pay off at the time of sale. However, choosing the right property is necessary to benefit from it.
For example, if you’re buying a place to rent out, it would generate thousands of dollars every month. Similarly, land you purchase through a debt today will be worth much more in the coming years. In this way, loans for property purchases fall under good debt.
- Debt for Education
Taking debt to fund one’s education is another good debt category. Since you invest in your future by upgrading your degree, it will be a positive step. An updated degree increases your chances of getting better job opportunities and a higher salary. The thought of paying off an education loan might seem dreadful, but managing monthly payments won’t be an issue with a stable income.
Bad Debts
Now, that you know of good debts, it’s time to learn about the other category. As told earlier, plenty of debt types can have negative consequences in your life, including:
- Credit Card Debt
Using credit cards has become common practice, but this is considered a bad debt. It’s the worst kind of debt to put on oneself. The interest rates for credit card loans are high, and you might get trapped into paying more than what you took. No doubt, spending from a credit card is tempting. After all, it’s hard to resist all that money, but if you fall for the temptation, you can say goodbye to peace in your life.
Usually, items bought with credit cards are not valuable or lose value in a few weeks. All that is left behind is loads of debt. Even if you pay a minimum amount each month, your balance increases. Some people reach a point where they can no longer manage their debt.
- Personal Loans/Payday Loans
What’s worse than credit card loans is taking out a personal/payday loan. These loans come with a high-interest rate and drown borrowers in debt.
You could use them to pay for any unplanned expense, but the problem arises when you have to repay these loans. The repayment schedule for payday loans is short, and most people reapply for a new loan to pay off the last one. It traps you in a payday loan cycle that won’t be easy to get rid of.
When do Good Loans become Harmful?
Choosing good debts is beneficial for your life, but these debts can also become a burden. Good debts can transform into bad debts if you’re not careful. That means using the loan amount for the right house, property, or degree.
If you choose a house with an unrealistically high value or a degree that doesn’t have any scope in the market, you automatically put yourself in a weak spot. Make sure to invest in an option that provides a return on your investment. In addition, lenders like BHM Financial Group could also help you get your desired loan amount without added troubles.
How to Avoid Falling for Bad Debt?
Some great ways to avoid falling for a bad debt is by:
- Saving money for emergencies instead of taking out loans
- Paying credit card bills on time to avoid paying higher interest
- Lowering credit card usage
Understanding the difference between good and bad debt is necessary. If you require assistance applying for a loan or need to understand the dynamics of good vs. bad debt, the BHM Financial Group’s team is here to help. You can apply today and get your desired amount in days. Our flexible plans make your life simpler.