Good Debt vs. Bad Debt

We often think of debt in a negative way. Many people associate it with financial problems and stress. However, not all debt is created equal. In fact, there are two types of debt: good debt and bad debt. Understanding the difference between the two can help you make better financial decisions and improve your overall financial health.

Good Debt

Good debt is a type of debt that helps you build wealth over time. It’s an investment in your future. Good debt typically has low interest rates and a long repayment period. Here are some examples of good debt:

Mortgage: A mortgage is a loan used to purchase a home. It’s an asset that you can sell in the future or use to build equity.

Student Loans: Student loans are a type of debt that helps you invest in your education. Earning a degree or certification can increase your earning potential and improve your chances of landing a higher paying job.

Business Loans: If you’re starting a business, taking out a loan can be a good way to invest in your business and help it grow. If you’re able to make your payments on time and your business is successful, the investment can pay off in the long run.

Bad Debt

Bad debt is a type of debt that has high interest rates and no real long-term benefit. It’s typically used to finance things that lose value over time or have no investment potential. Here are some examples of bad debt:

Credit Card Debt: Credit card debt is one of the most common types of bad debt. Credit cards often have high interest rates and people can easily fall into a cycle of debt by only making minimum payments each month.

Auto Loans: While it’s necessary to have a car for many people, taking out a car loan is often considered bad debt because cars depreciate in value quickly. If you take out a loan for a car and the car is worth less than what you owe on the loan, you’re left with negative equity.

Payday Loans: Payday loans are short-term loans that often have high interest rates and fees. They’re often used by people who need money quickly, but they can lead to a cycle of debt that’s difficult to break.

Debt Repayment

If you have both good debt and bad debt, it’s important to prioritize paying down your bad debt first. This is where good debt can come in handy. For example, if you have a credit card balance with a high interest rate, you may be able to use a low-interest line of credit to pay off the balance. This will not only help you pay off the debt faster, but it will also save you money in interest charges. Just be sure to only take on additional debt if you can afford to make the payments and have a solid plan to pay it off. Remember, good debt can be a useful tool, but it should always be used responsibly.

By making smart financial decisions and only taking on debt that has a real long-term benefit, you can improve your financial situation and build a better future for yourself and your family.

Be Well Advised.