While many people think of debt as being a bad thing, this is not always the case. Some debts are brought on by careless spending and can lead to problems for a person. Some debts, considered good debts, are those that are needed for big purchases such as a home. This kind of debt brings value to a person’s life. Understanding the differences in good and bad debts can help individuals to better manage their finances and even improve their financial outlook with debt consolidation.
What Is Considered Good Debt?
There are some things that are worth going into debt over. If going into debt brings you something that is going to generate an income or increase net worth, then it may be worth it. Whenever someone enters into debt, they need to be sure they carefully consider their options before making a final decision. Debt should never be entered into lightly.
Seeking a college education is worth going into debt as long as you are choosing an educational path that will lead to a solid career. Those with higher educations are generally able to secure a higher paying job. Investing in your future is always a sound decision and a good reason for going into debt.
Purchasing real estate is a type of good debt. Whether you are purchasing a home to live in or property for investment, both can improve net worth. Many people purchase a home and live it in for a few years before moving out and using the home as a rental. A rental property can bring in a steady source of income.
Starting a small business is also considered good debt. As long as you have carefully researched and are prepared to work hard, owning a small business can help to increase your net worth and income.
While good debts are considered more acceptable than bad, debt should never be thoughtlessly pursued. Whenever considering going into debt, think about whether or not the purchase is going to benefit your future income in some way. If it is not, you may be heading towards a frivolous purchase that is later a regret. Many people who get in over their heads with debt find themselves there because of poor financial decisions.
What Are Bad Debts?
Bad debts are those that are used to purchase items that will not add value or will depreciate over time. Generally speaking, you should avoid debts that will not increase your net worth or add income. For this type of purchase, it is wise for individuals to save money and make a cash purchase instead of creating more debt.
A new car purchase is bad debt. Cars immediately begin depreciating in value. New cars are expensive and they will not increase your net worth or give you income. Many people purchase a new car for pride reasons. Instead of getting into debt, it is wise to save money and purchase a used car with savings.
Credit cards are the worst of bad debts. The interest rates for this type of debt are often much worse than consumer loans. Because of the setup of payments, they are stretched out in such a way as to cause higher amounts of interest to be charged. Credit card debt should be avoided as much as possible.
Clothing, goods and services, and consumables should never warrant going into debt. These expenses can sometimes be frivolous. Going into debt for vacations, new wardrobes, and other goods is a waste of time. The interest paid on these debts is wasted and could have spent more wisely.
Some Debts Are Neither Good or Bad
In some cases, debt is not necessarily good or bad. One such case is debt consolidation loans. If someone is in over their heads with high-interest debt, taking on a debt consolidation loan can be helpful.
Using a debt consolidation loan to pay off high-interest bad debts will help to decrease the amount owed. The most important tip for obtaining a debt consolidation loan is to use the extra money that is being saved to pay off other debts. By taking this strategy, you will be able to pay off your debts much faster and reduce the amount of interest that is paid.
Making the right choices when going into debt is essential. Choosing good debts helps to increase your net worth and income, but they should not be pursued often. With too much debt, individuals find themselves struggling to make payments and the interest can become overwhelming.
When debt becomes a big problem, a consolidation loan may be beneficial. Using the money to pay off the high-interest debts that are owed can lessen the payments, freeing up money to pay off other debts. Taking on debt can sometimes be a good thing, as long as it is approached sensibly.