Bad Debt and Good Debt
Getting a loan from a bank or borrowing from your friends means you are in debt. You will end up paying more to make purchases because you have to pay interest for the debt.
How do you distinguish between good debt and bad debt? Here are some examples:
Good debt
Education: You get an educational loan to do advance study. This is an investment in you. With the knowledge you gain you will be more insightful to work effectively and enhance your earnings and pay off your loan.
Housing loan: This is a major purchase and a roof over your head is necessary. This is a good investment as land is limited and your property value will appreciate in due course.
Car loan: This is another necessity in life so that you can move around easily and quickly. A car does not appreciate, but depreciates over time, but you save valuable time moving around to get things done. Get a car loan only when you can factor in the monthly repayments into your budget.
Consolidated loan: It is a good move to consolidate all your credit card balances into a loan with very much lower interest rate. You will pay off the debt in less time with less interest.
Investment: When you know it is a solid investment opportunity and the value of your investment will increase in the long term.
Bad debt
Buy what you want: Buying something for no practical uses and get yourself into debt is a no-no. Don’t get materialistic.
Renovate or beautify your house: Your house is in good condition, so don’t spend unnecessarily to renovate or beautify your house.
Adding accessories to your car: You car is shinning and new; don’t borrow money to add gadgets with no practical uses or improvement in its performance.
Overseas holidays: It is better for you to save up a sum for the dream holiday. It costs less and you are not in debt after an enjoyable holiday.
Borrow only when you can get a better return or to build wealth, otherwise don’t borrow to spend unnecessarily.
How do you distinguish between good debt and bad debt? Here are some examples:
Good debt
Education: You get an educational loan to do advance study. This is an investment in you. With the knowledge you gain you will be more insightful to work effectively and enhance your earnings and pay off your loan.
Housing loan: This is a major purchase and a roof over your head is necessary. This is a good investment as land is limited and your property value will appreciate in due course.
Car loan: This is another necessity in life so that you can move around easily and quickly. A car does not appreciate, but depreciates over time, but you save valuable time moving around to get things done. Get a car loan only when you can factor in the monthly repayments into your budget.
Consolidated loan: It is a good move to consolidate all your credit card balances into a loan with very much lower interest rate. You will pay off the debt in less time with less interest.
Investment: When you know it is a solid investment opportunity and the value of your investment will increase in the long term.
Bad debt
Buy what you want: Buying something for no practical uses and get yourself into debt is a no-no. Don’t get materialistic.
Renovate or beautify your house: Your house is in good condition, so don’t spend unnecessarily to renovate or beautify your house.
Adding accessories to your car: You car is shinning and new; don’t borrow money to add gadgets with no practical uses or improvement in its performance.
Overseas holidays: It is better for you to save up a sum for the dream holiday. It costs less and you are not in debt after an enjoyable holiday.
Borrow only when you can get a better return or to build wealth, otherwise don’t borrow to spend unnecessarily.
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