“Good debt is a powerful tool but a bad debt can kill you.”
Before you knock the door of a bank or a credit card company, it’s essential to know the basic difference between good debts and bad debts. Some debts are good and can bring a positive change in your life. On the other hand, bad debts can push you towards a financial mess and make you bankrupt.
Good debts – A friend who can help you prosper
Good debt is a friend who can help you grow in the long run. It is a sensible investment that can leave you in a better financial position after some time. People usually have a valid reason and specific goals for taking out a good debt. Plus, they have a practical and affordable repayment plan to pay it off.
The biggest examples of good debts are student loans and mortgages.
Mortgages help you buy a home. You can live in that home with your family, build dreams, and create beautiful memories. Once you pay off the mortgage, you become the true owner of your home. Even if you don’t want to live in that home after several years, you can sell it off and get a good return on your investment.
Education is costly, but a student loan helps you become a graduate. Once you complete your studies, you have a better chance of getting a job. The interest rate on a student loan is low and you can start making payments after finishing your studies.
Bad debts – A devil in disguise
Bad debts are the devil, their aim is to eat your wealth gradually.
In simple terms, bad debts are bad investments that don’t give you benefits in the long run. These debts are expensive due to high interest rates. Some payday loan lenders charge 500% interest rates. Most people can’t afford to pay such a high rate of interest and get into a bigger financial mess. Likewise, some credit cards carry an interest of 30%. Do you know what that means? The outstanding balance can double in just two and half years.
Often, people incur bad debts when they make impulsive purchases. They buy things that are unnecessary and beyond their financial affordability. For example, apparels they don’t like to wear, kitchenware they never use, books they never read, etc.
Biggest examples of bad debts:
* An expensive vacation – A luxury trip should be avoided if it keeps you in debt for a long time.
* An expensive payday loan – This is the worst form of bad debt. Many states have banned payday loans for this specific reason.
* A brand-new car – The value of a car depreciates with time. So, if you have a car, don’t buy another one unnecessarily.
Case resolved: Opt for good debts and shun bad debts
Try to avoid bad debts in your life as they have the potential to make you bankrupt. Don’t borrow money if you can’t afford the monthly payments. Before applying for a loan, ask yourself if it would help improve your finances in the long run. Shop for the best deal in town and evaluate the pros and cons of taking out a loan. Remember, it’s about your financial future. You can’t play with it.