Some people try everything possible to stay clear of debt because of the risks that are associated with it. However, not all debt is bad.
Debt can also be good. Financial advisers agree that if your debt increases your net worth, it’s considered good debt, and if it does the opposite, it’s bad debt. Home loans, student loans, and business loans are considered good debt because they increase your net worth.
Good debt is an investment. For instance, when you purchase a house with a home loan, you’re improving your financial standing. Once you pay off the loan, the house will be your property, and you can sell the house at a higher price than what you bought it for. This also applies to student loans and business loans, which help you improve your chances of earning a higher income.
On the other hand, credit cards, overdrafts, pay-day loans, and vehicle loans are considered bad debt because they decrease your wealth. Most of these loans are taken on impulse, they incur higher interest rates than most loans, and they can easily lead to being over-indebted.
Many people use these loans recklessly to purchase unnecessary items. Some people use them to pay off debt which perpetuates a cycle of debt. If you find yourself having to pay for emergencies with credit cards, just know that you’re using debt in a bad way.
What about personal loans?
Personal loans can be good or bad, depending on what you’re using them for. If you take a personal loan to purchase clothes or furniture, you’re not going to reap any returns from that. Clothes and furniture aren’t going to earn you any profit. However, if you’re taking a personal loan to finance your studies, it can’t be considered bad debt because you’re investing in your future.
So, whenever you’re taking out debt, there are always many factors to consider, such as the term of the loan, the interest rate, affordability, and whether the asset you’re going to purchase is going to help improve your future.
Even what’s considered bad debt can turn out to be good debt if you use it wisely. For instance, a vehicle loan can be good debt if you use it to buy a vehicle that’s going to help generate an income. A credit card can be good debt if it’s used to buy income-generating assets.