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

Credit Cards

One of the leading causes of stress comes from having financial problems, specifically lots of debt.

Whether it is a mortgage, credit card debt, or student loans, most people, unfortunately, have some type of debt.

The word “debt” is intimidating and most people in America assume that debt is automatically bad. You can make the argument that having no debt is a good thing, but sometimes it is necessary and actually beneficial to borrow money.

Borrowing money is justifiable in order for people to get ahead in certain scenarios. Not everyone can afford to buy everything in cash, and some experts even argue that using credit is actually a better way to purchase things.

Taking on unnecessary debt is what tends to get people in trouble. Since there is so much debt out there, let’s take a look at the difference between good and bad debt.

What is Good Debt?

Good debt is any debt that helps increase your net worth, generate a new source of income, or will increase in value in the future.

Along with this, good debt can also be smaller loans that are managed responsibly and paid off in time that will evidently promote a good credit report.

If you manage these types of debts responsibly, then you can positively impact your life.

Mortgage

If you are on this planet then you need somewhere to live. Duh!

If you are looking to buy a home rather than pay rent, then you are most likely going to need a mortgage.

Most people simply get a loan from the bank to buy a home, live in the home for a number of years, then either sell it for profit or give it to a family member. The goal is that by the time your home is paid off that it has increased in value.

Most homes go up in value over time which is why a lot of people want to buy rather than rent. House prices began to slowly increase starting in the late 1960s and are currently at some of their highest prices ever.

Of course, the economic collapse of 2008 had a drastic impact on many people, but house prices eventually bounced back and continued to increase after 2010.

According to the Federal Housing Finance Agency, house prices increased over 10% during the 2020 lockdown alone.

Along with this, there are numerous potential tax breaks for people who have a mortgage. A lot of the time, you can deduct the interest on mortgage debt when tax season comes around.

Owning a home also allows you to access a home equity loan. The purpose of these loans is to build and renovate the home being used as collateral, so it can increase in value even more.

Real Estate Investing

If you really wanted to, you could also rent out your real estate.

Many people get into real estate investing by taking on “good debt” and purchasing numerous homes or apartment complexes.

They buy residential homes and rent them out in order to build a stable source of cash flow. As long as the rent price is higher than the mortgage expenses, then the owner of the house will be able to make money every month while also having the home increase in value over time.

While there are many risks associated with real estate investing, many people change their lives for the better by using this passive income process.

Business Loan

If your goal is to become wealthy then you most likely are going to need to start your own business. Maybe your dream is to open your own ice cream stand or your own food truck that brings in thousands of customers each year.

If you don’t have enough start up capital, then you are going to need to get a loan in order to finance your endeavor.

Being your own boss can be very rewarding and can bring great success, but it is often hard work. Starting your own business is risky as well because there is no guarantee of success.

With that being said, if you work hard and are knowledgeable then you can become a successful businessperson and turn that “good debt” into fortunes.

What is Bad Debt?

Bad debt is any type of debt you take on to purchase something that depreciates in value over time. This type of debt has no return on investment and will end up costing you in the long run.

Along with this, bad debt is debt that you can afford to take on or repay in the future. These types of purchases will evidently affect your credit score which will prevent you from getting financing in the future.

Car Loans

Most of the time, financing a vehicle is not the right move to make. Most vehicles depreciate in value as soon as you drive them off the lot. Some experts say they can lose 20 to 30% on the first drive down the road.

Cars ultimately will get dinged up, scratched, and stained. This means that in most cases the price of the car will drop in value over time.

With that being said, Covid-19 had an effect on the used car market, so the past few years buying a new car was almost the same as buying a used car, but experts say the car market will eventually return to normal.

The better decision is to buy a vehicle used, but if you have to finance a vehicle make sure you have a low interest rate.

If you are financing a vehicle for work, such as a truck for landscaping, that will make you money, then you can argue that debt is good.

Credit Cards

Don’t let that plastic ruin your life.

If you are swiping that credit card on stuff you don’t need then you are ultimately putting yourself in a position to fail financially.

Getting stuck with a credit card bill that you can’t pay off will not only prolong the debt, but it will affect you from getting financing for bigger purchases.

Credit card companies know every time you swipe that card, and if you fail to pay your bills on time then you are screwing yourself.

Use a credit card responsibly and pay your bills on time.

Are Student Loans Good or Bad Debt?

There is no correct answer to this question. The answer to this relies entirely on your personal situation.

Some people argue that a “good education” will propel you in life and get you a higher salary in the future.

If you are aiming for a high paying job that requires a college degree, then yes, the loans are probably worth it. As long as you can afford the loans then this could be considered as good debt.

On the contrary, it has become harder and harder to get a job out of college. More and more people are getting a degree each year which means the value of a college degree has decreased.

If you get a degree that leads to a low-paying job and you can’t afford the repayment process, then these loans would be considered bad.

Some people argue that blue-collar jobs are better since they don’t require taking out massive loans.

Whatever you are thinking of doing, just make sure to do your research.

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