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Good Debt vs Bad Debt: The Key Differences Explained

by Josh Biggs in Finance on 27th March 2020

It is beneficial to understand the difference between good debt and bad debt. You can check out our guide right here to learn more.

Not all debt is bad. While do one wants to be drowning in it, there is some debt that serves as an investment in your future.  

To understand why that is, we’re going to break it down for you. 

Here’s the difference between good debt and bad debt and how you can make debt work in your favor.

What is Good Debt? 

Good debt is debt that can help you achieve your goals, rather than derail them. Below are some examples of debt that’s worth incurring. 

Your Mortgage 

What better investment for your future than the home you provide for yourself and your family? A mortgage is considered a great source of debt–you’ll build equity and have the security of owning your own home.

When looking toward homeownership only take on what you can comfortably afford to pay each month to make this debt manageable. 

Student Loans 

If you want a good education you’ll need the money to pay for it. Most people don’t have enough in their savings to pay for college without the need for aide. Student loans tend to have lower interest rates and are also an investment in your future. People with a bachelor’s degree typically earn a higher income than those without. 

A Small Business Loan

If you want to grow your wealth, starting a business is the way to go. To get there you’ll likely need to take out a small business loan. Keep in mind that this is not an easy route and 20 percent of small businesses fail within the first year.

However, if you’ve got grit, ambition, and good business acumen you have a chance. If the one thing you’re lacking is the startup money, a small business loan can be just what you need to get your business off the ground and start building your wealth. 

What is Bad Debt? 

The one thing that good debt has in common is that they all help you work toward a more profitable future. Bad debt does the opposite by providing relief in the short-term and costing you more money over time. Some examples of bad debt include: 

High-Interest Rate Credit Cards 

Credit card debt, particularly for nonessential items, is never a good idea. Those with high-interest rates of 20 percent (or even higher!) are even more costly. If you’re drowning in credit card debt and suffering from high-interest rates, it may be time to consider debt consolidation. Here are all the details about how debt consolidation works. 

Certain Auto Loans 

The minute you drive your car off the lot it loses value. However, cars are a necessity for most people and so are auto loans. When looking into financing a car, look into models that are meant to last and that hold their value for longer. 

Using Debt to Your Advantage 

Debt is simply a part of life for most people. It’s a matter of determining what debt is necessary and what to avoid. Housing and education and putting money toward owning your own business can help you grow your wealth in the future. 

Knowing what is good debt will help you make the right choices and stay away from debt that will cost you in the long run. Need more money tips? Check out the rest of our site. 

Categories: Finance