Your parents may have taught you that all debt is bad, but that’s not really the whole story. In fact, there’s good debt and bad debt, and as the saying goes, knowing the difference is the key to fiscal responsibility. Even if you don’t spend any time working on or thinking about your debt other than when the monthly bill comes, you’re being judged each and every day by the debt you keep, and good debt can increase your financial value even if you still owe a ton. Furthermore, good debt can make it easier to secure financing for a big purchase or to get a low-interest rate on your next credit card.
How is good debt different?
Unlike bad debt that carries a high-interest rate or becomes difficult to pay off over time because of compounding interest, good debt is usually defined as debt that is an investment in your future. They’re loans for things that increase your net worth and show that you’re a responsible member of society, and good debt can make it easier to borrow more money with lower interest rates than otherwise.
For the most part, good debt has lower interest rates and is an essential part of growing up, joining the workforce, and becoming a model citizen.
The first type of good debt is a student loan, which is regarded as a necessary investment in your future. They typically carry very low-interest rates, which means you won’t pay much more than the loan principal over the lifetime of the loan, and, once you graduate, your earning potential skyrockets. Experts say this kind of practical debt is unavoidable and even desirable, especially if you’re trying to improve your position in life. But once you complete your studies and get your degree, you’ll be able to command a higher salary, bring home more money and, yes, take on more debt if you want.
Another type of good debt is a home mortgage. As the biggest purchase that you’ll likely make, a home mortgage is just a loan from the bank while you work on paying off your home. Even if you owe hundreds of thousands of dollars, a mortgage is considered good debt because you’re also building your net worth every time you pay your bill. A mortgage is also pretty much the only way most of us can afford a home unless you’ve got a pile of money stashed somewhere.
The third type of good debt is a car loan, which is what makes that $30,000 car shrink into an affordable monthly payment of just a few hundred dollars. An essential part of everyday life, a car means you have reliable transportation to and from work, and once you pay it off you’ll have an asset worth some real money — your car.
While some people believe that medical debt is good debt, it’s really a grey area. Medical debt isn’t exactly elective and it doesn’t even carry an interest rate. That said, it is debt, and it’s not going to increase your net worth or help you land a job, but if you have enough medical debt, it can turn into a real financial hardship.
What about bad debt?
If good debt is everything we covered above, bad debt is simply everything else. They can drag down your financial situation and make other, good debts hard to pay off, and they include debts with high (or variable) interest rates or debts that are used to pay for discretionary expenses.
Credit card debt and small loans used to buy consumables are all considered bad debt. However, bad debt can also be good debt that you’ve simply lost control of, such as a car payment or thousands of dollars in furniture expenses that you can no longer afford.
Basically, bad debt is anything that you buy on credit that loses value over time. Whether you ran up a credit card bill buying clothes, furniture or to deck out your multimedia room, all that stuff isn’t worth much to creditors, and it won’t help you make any more money or further your lot in life so it fails the good debt test.
When in doubt, you’ll want to avoid taking on any debt if you still have the cash to pay off your expenses, or to wait until you have the money before you make that next big purchase. You’ll be able to search for the right deal the longer you wait, and if you buy it now you’ll actually pay more money over a longer period of time for the exact same thing, so think twice before you charge that big expense.
About Wise Loan
If you’re having trouble securing the money you need to pay for everyday expenses, we’re here to help. With early approval and same-day or next-day funding, you can get money even if you have bad credit. It only takes five minutes to fill out an application, and once you pay off the loan you’ll be on your way towards building a good debt history, which will help you, even more, the next time you need money. Apply and get approved today, and we’ll send you your money ASAP!
