Good Debt vs Bad Debt: Which is More Evil?

Thursday, November 8, 2012, 2:00 AM | 8 Comments

It is next to impossible to enjoy a debt-free life as majority of the people are unable to pay hard cash for some of the most significant things in life like a new home, college education or a car.

The most vital thing to be kept in mind when taking a loan is whether the debt acquired is a good debt or bad debt.

Are There Any Good Debts In The World of Loans and Finance?

The answer is a yes. Good debt is generally a deal that will increase in value or produce income for a longer period.

Taking a student’s loan to pay for your education is generally classified under good debt as the interest is very low and then education boosts your worth as a worker and raises your probable future income.

Taking a loan for purchasing a house is also a good debt. Even home loans carry a comparatively lesser interest rate with the added benefit of tax deductions rolled into the transaction. With the time the home that you purchased keep increasing in market value and it proves out to be a good debt.

An auto loan too would be a good debt especially if that means of transportation is good for your business.

Home equity loans are also thought to be good debt as they too have lower interest rates.

Bad Debts

On the other end, Bad debt is one form of debt that is acquired to buy those things that rapidly lose their value and in the process do not create long-term income.

Bad debt also carries a high interest rate. It is advisable to save yourself from bad debts and in case you cannot afford then, it’s best to stay away from such bad value occurrence.

Paying for luxuries from your credit card is a bad idea and will surely lose its value with the passage of time.

Payday Loans or Cash Advance Loans

These types of loans are some of the nastiest variety of debts. In the payday loan, the person who is borrowing the money gives a personally signed check to the lender for the money he borrows and the fee as well. Then he has the stipulated time to give back his loan along with the interest amount during that period of time.

The payday loans carry an exorbitantly high interest rate, something in the range of 300% annually. So, going for this kind of a loan would be like slitting your throat.

Good debt are those that involve anything you require but cannot afford to pay the entire sum at one go but can pay it in installments without dipping into your cash reserves or liquidating all the invested money.

Whereas Bad debt incorporates debt that you have taken for the things you do not require like a foreign trip, a luxury car which could have been easily avoided.

The most horrible kind of debt is the debt taken through a credit-card as the interest rates are astronomically high. You simply cannot stay debt-free, so always try to acquire the debts that give you good long term benefits.

Calvin Strander is the author of this post. He helps provide financial assistance along with free credit score to help you plan your finances accordingly.

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