Know Their Differences: Good Debt and Bad Debt

Debt is a subject that is hard to talk about because it is a sensitive and complicated topic. Many relationships have been broken because of debt. This mostly happens with personal loans which can be avoided if the terms and expectations, preferably in writing, to avoid misunderstanding and maintain a healthy relationship.

It is always better to avoid debt, however, there are times when we can’t avoid it — It is important to know what adds value to us and what will harm your financial situation.

Bad debts will negatively impact your financial situation, such as high-interest loans or something that will lose value over time. Here are some examples of bad debts:

1) Debt That Exceeds Your Ability to Pay

You incur a bad debt if the debt encourages you to spend more than what you can afford, leading you to difficult financial situations.

2) Debt That Exceeds its Value

This kind of debt is usually in the form of installments. Installments add more to the original price of the item, which leads you to pay more than the value of the item or payment terms longer than the lifespan of the product.

3) Debts that Affects Your Savings

When the debt affects your savings, especially emergency funds, that is a sign of a bad debt. Debt should not compromise your capacity to handle unexpected expenses, such as hospitalization or home/car repairs.

Good debts are those that have the potential to improve your financial situation like getting a loan for capital, debts that will enhance your income generation, or debts that will improve your current situation. Here are some examples of good debts:

1) Business Loans

A business loan is a good debt as it will help you generate income and improve your current financial situation. Whether you are planning to start a business or an entrepreneur that needs money to improve your business, a business loan will help you.

2) Home Loans

Owning a home is a big financial step. Securing a home is essential for yourself or your family. It can also be an asset that can be sold or rented out for income.

3) Car Loans

The value of a car relies on convenience and comfort. Some people need their own transportation or they need it for extra income like renting it out, use it for their business, or be used for ride-hailing and public transport.

The bottom line here is that you need to know what you are getting into. It is important to note that before considering a loan make sure that your income will be enough for your needs and the payment of your debt. Debt is not always bad, sometimes it can be a necessity to improve one’s financial situation in the long run. (ASC)