Debt is a word that many of us do not like to be associated with. Most of us might even fear debt as much as we fear death. We have all heard of horrific stories caused by debt or how people’s lives were ruined due to debt.
However, this is mostly caused by a lack of understanding. To the surprise of many, there’s a difference between good debt and bad debt.
What is a good debt?
A debt is considered to be good when the money borrowed is used to purchase assets that will help you build your wealth. These debts are classified as sensible investment. With a clear purpose and a clear repayment schedule behind the debt makes it a good debt.
In short, it is a form of investment that should help you generate income over time.
Examples of good debts:
- Real estate / property loans
- Education loans
- Small business loans
- Home improvement / upgrading loans
What is a bad debt?
On the other hand, bad debts are money borrowed for ventures that will not generate any income or increase your value. If the debt does not lead to any improvement in your life or your assets, it is considered a bad debt. It will also be considered a bad debt if you use the money to purchase an asset with depreciating value.
Examples of bad debts:
- Credit card debts
- Car loans
- Loans for unnecessary spending / spending on branded goods
- Personal loans or payday loans