Good Debt vs. Bad Debt: What’s the Difference?

It’s no secret that debt can be a huge burden. But what makes some types of debt good and others bad? What does that actually mean? And more importantly, which one should you be trying to avoid?

Debt is generally qualified as either good or bad. If you start taking out debts to build up credit, you need to understand the difference between good debt and bad debt so that you know what to expect from taking on either.

What is Good Debt vs. Bad Debt?

Everyone knows that debt is bad, right? Well, not exactly. There is such a thing as good debt and bad debt. Good debt is debt that you incur in order to make an investment that will grow in value over time. For example, taking out a loan to buy a house or investing in a solid education are both examples of good debt. This is because the value of your home will increase over time, and education will lead to higher earnings and more job opportunities. 

On the other hand, bad debt is debt that you incur for things that will decrease in value over time. For example, using a credit card to finance a vacation or taking out a loan to buy a new car are both examples of bad debt. This is because the value of your vacation will go down as soon as you return home, and cars depreciate in value as soon as they leave the lot. 

Generally, it’s best to avoid bad debt and only take on good debt when you’re confident you can repay it.

Different Types of Debt

There are many different types of debt. Some of these include:

• Mortgages
• Student Loans
• Car Payments
• Credit Cards
• Personal Loans
• Payday Loans
• Business Loans

Good Debt

Good debt is considered an investment in the future. It is a financial tool that allows you to add value to your life and create a positive financial future. This can be in the form of an increase in your net worth or as an income-generating tool.

Mortgage

A mortgage is a loan that you use to buy a property. It is an agreement between you and a lender that gives the lender the right to take your property if you fail to repay the money you’ve borrowed plus interest. A mortgage typically takes anywhere from 15 to 30 years to pay.

A mortgage is good debt because it allows you to buy a property without having to pay the full amount upfront. This means that you can start building equity in your property from day one. 

In addition, the interest rate on a mortgage is usually lower than the interest rate on other types of loans, such as personal loans or credit cards. This means that you can save money by taking out a mortgage instead of another type of loan. 

Finally, if you are able to keep up with your monthly mortgage payments, you will eventually own your property outright. This can provide you with security and peace of mind in knowing that you will always have a place to live.

Small Business Loan

Taking out a loan to start or grow a business can be a risky proposition, but if everything goes according to plan, it can also be a very lucrative one. The key is to ensure that the loan is used wisely and that the business is able to generate enough revenue to not only make the payments but also to pay off the loan within a reasonable timeframe. 

When done correctly, a business loan can be an excellent investment that provides a much-needed infusion of cash and helps to fuel growth. With a little luck and hard work, your small business can grow into a great investment.

Student Loans

Student loans can be considered good debt because they allow you to invest in your future by getting an education. An investment in your education will pay off in the long run through higher earnings and better job opportunities. 

Additionally, student loans typically have low-interest rates and offer flexible repayment options, making them easier to manage than other types of debt. So while all debt should be used cautiously, student loans can be a good way to invest in your future.

The Benefits of Good Debt 

Good debt is often thought of as a necessary evil because it can be used as a tool for building wealth. By investing in assets such as real estate, you can use debt to leverage your investment and potentially earn a higher return. Of course, it’s important to be wise about the debt you take on and to always make payments on time. But when used responsibly, good debt can be a powerful financial tool.

Bad Debt

Bad debt hurts your net worth. These debts are used to buy things that lose value over time, such as cars and clothes. They typically come with higher interest rates, which cost you more money.

In general, any debt you cannot afford or won’t make money from is considered a bad debt. However, it may be difficult to avoid taking on bad debts. Common types of bad debts are credit card debt, car loans, and personal loans. You should be aware of these common types to determine whether or not taking on the debt is worth it.

Credit Cards

Credit cards are one of the many ways that people can get into debt. When you use a credit card, you are borrowing money from the credit card company. This means that you will have to pay back the money that you borrowed, plus interest and fees. This can quickly become a cycle of debt that is difficult to break out of. 

One reason why credit cards are an example of bad debt is that the interest rates are often very high. This means that you will end up paying back more than you originally borrowed. Another reason is that it can be easy to spend more than you can afford to repay. This can lead to late payments and even defaulting on your debt. 

Finally, credit cards can also have annual fees, which add to the cost of borrowing money. For all these reasons, it is easy to see why credit cards are an example of bad debt.

High-Interest Loans

Everyone wants to get their hands on extra cash, but taking out a high-interest loan is typically not the best way to do it. For one thing, the interest rate will be much higher than the interest rate on a standard loan, which means you’ll end up paying back more money in the long run. 

In general, high-interest loans are an example of bad debt – so it’s best to avoid them if possible. Additionally, high-interest loans typically have shorter repayment periods, which can put a lot of pressure on your finances. And if you’re not able to repay the loan, you could end up damaging your credit score.

Payday Loans

A payday loan is a type of short-term loan where you borrow against your next paycheck. Payday loans are typically small; usually, $500 or less, and are due in full on your next payday. While payday loans may seem like a quick fix for unexpected expenses, they can quickly turn into a cycle of debt. 

Payday loans typically carry high-interest rates, often as much as 400%. In addition, many payday lenders require borrowers to provide access to their bank account or write a post-dated check for the full loan amount. If you can’t repay the loan on time, the lender can simply cash the check or electronically withdraw the money from your account. As a result, you could end up paying steep overdraft fees or having your account closed. 

For these reasons, payday loans are an example of bad debt. You may be better off exploring other options, such as borrowing from family or friends or using a credit card with a lower interest rate.

Final Thoughts

It’s not always a bad thing to be in debt. The right sort of debt can help you become financially stable. In fact, even bad debts can be used wisely if you know how to manage them.

However; the best way to avoid getting in over your head is to be careful about how much money you borrow in the first place. Only borrow what you know you can afford to repay and make sure you have a solid plan for doing so. 

If you find yourself in a situation where you can’t repay your debt, don’t hesitate to seek help from a professional financial advisor. They can help you develop a plan to get out of debt and back on track.