Borrowing money implies creating debt. Sometimes, it is your one and only option – the necessity of a new car. Other times, it is simply more convenient to get something now, rather than wait until you save the money for it – you do not mind paying a bit more either. Now, debt can go in two different directions – you have good debt and bad debt. What do these two concepts mean and what are the differences between them?
Understanding what good debt means
Good debt is an investment in your future – usually, the financial one. While you do end up with debt, the long term results tend to be financially better. The impact over your financial position could be low in the early stage and massive later on. Just like any other type of loan such as guaranteed payday loans, this type of debt requires proper planning and a realistic view over the future.
You have to work on clearing the debt as quickly as you can – make sure monthly payments are affordable though. Good debt also involves finding the cheapest way to borrow money. You need to work on the credit amount, charges, terms and interest rates. Sometimes, you might have to find a middle solution between all these.
Good debt can come in more shapes. A student loan is one of the best options – you become a graduate, get a good job and pay the loan off. A mortgage can also represent good debt because you can purchase a home – much better than paying rent. You can also invest in your own business if you have a strong plan. As for getting a car, make sure you purchase a vehicle that you can afford.
Disclosing the concept of bad debt
Bad debt will most likely affect your wealth in a negative way. Generally speaking, it is not very affordable. Other than that, unlike good debt, bad debt will not pay for itself later on. Opposite to good debt, the bad alternative will not always come with a realistic plan. It usually occurs when people make bad financial decisions.
For instance, an impulse purchase is a bad idea. You may not necessarily need that thing. If you need to borrow money to pay your bills, this is also considered bad debt. As a general rule of thumb, think about how you plan to repay the debt. If you are not 100% sure you will be able to repay the loan, you should simply avoid bad debt.
Bad debt can take more forms. For instance, a luxury holiday might be nice to relax, but it is not necessarily a good choice if you cannot afford it. If you end up paying for it for years, you will get into bad debt. Instead, try saving up for this holiday first. You might as well consider a holiday that you can actually afford.
Do you really need a brand new car? New cars lose their value fairly fast. If you end up with financial difficulty, you may not be able to repay the loan – not even if you sell the car. Simply put, you could end up with no car and lots of money to pay. Borrowing money for bills or to cover credit is highly contraindicated too – it will provide relief in the short run, but it will not help overtime.
Bottom line, you have to consider your options in very small details. Good debt can be a good thing if you plan everything upfront, but bad debt and financial issues will come back at you when you least expect them.