As it stands, incomes aren’t growing, but many people are spending more. Many people have easy access to debt which, helps them extend their income, so to speak, but not really. They use credit cards, loans, and lines of credit as an extension of their income. However, all debt isn’t bad debt. Understanding the difference between good and bad debt helps many people increase their overall net worth. Continue reading to understand the difference between good and bad debt and how you can make debt work for you.
What’s the Deal with Good Debt?
Owing another person or company money is a difficult position to be in, but borrowing money is one of the easiest ways to broaden your horizons in life. When people borrow money to enhance their future and build value, their indebtedness isn’t the same as someone borrowing money to maintain a standard of living. The following are a few examples of good debt.
Student Loan Debt
College loans help students increase their value. In theory, students who received student loans can pay their debt after entering the job market. In essence, college loans helped students improve overall; therefore, having student loan debt isn’t bad debt. Student loan consolidations, such as those provided by Lendkey, are also considered good debt.
Many people get a loan to start a small business after they graduate from college. Getting a small business loan to start a business is debt, but it isn’t considered bad debt since the debt is used to increase a person’s net worth.
After you graduate and begin working at your new job, getting a home may become a top priority. You shouldn’t worry too much about your mortgage debt because it too is considered good debt. Purchasing a house is an investment, even though you may create a debt. The home is an asset and appreciates in value over time.
Most of the time, good debt has low-interest rates. From private student loans to mortgages, the cost of the debt doesn’t place a financial strain on the borrower, which helps them pay off the debt quickly. On the other hand, the cost of bad debt can jeopardize your future.
Understanding Bad Debt
In short, bad debt is debt that doesn’t increase your value. If you are considering a certain type of debt and it doesn’t help you increase your net worth or create an income for yourself, then the debt is bad for you. The following are a few examples of bad debt.
When you get a car loan, you effectively diminish your value. Car loans carry high interest rates, which decreases your income. Additionally, car loans pay for an asset that decreases in value, which offsets your overall net worth.
Credit Card Debt
In general, credit cards are used to purchase items that carry no real value. As a result, credit card debt, even at low interest rates, is considered bad debt.
There are other types of debt people take on that do nothing to increase their value. If the debt is avoidable, then it is more than likely bad debt. With a little patience and savings, most people can avoid these types of debts.
Debt seems to be a way of life for most people. However, each type of debt shouldn’t be placed in the same category. Good debt, such as student loans and mortgages, can help people improve who they are now and in the future.