Last Updated on May 20, 2021 by MoneyVisual
Some people believe that no debt is good debt. This mentality may be understandable when it comes from someone who has had debt problems in the past, but the truth is that not all debt is entirely negative. Some types of debt can help you meet your financial goals, or improve your overall quality of life; these are labeled as ” good debts” and can be very helpful if managed correctly.
However, there are other types of debt that instead of helping you fulfill some of your dreams, will only serve to provide some short-term satisfaction, and then become a burden that for many people often becomes overwhelming. These are known as “bad debts” and are the root of the stress and frustration of millions of Americans every day.
Before taking on debt, it’s important to understand the type of debt you’re taking on. That way, you’ll know if it will benefit you in the long run, or if you should avoid it altogether to avoid future headaches. Here you will find all the information you need about good debt and bad debt, so you can make better financial decisions and live a stress-free life.
What is Good Debt?
Simply put, good debt is an investment in your financial future that adds value to your life. Good debt will always benefit you in the long run and should not be a negative burden on your current financial situation.
It may seem strange to call debt an investment, but that’s exactly what they are. If you took on debt to invest in something that will gain value over time or something that will allow you to live more peacefully or make more money in the long run, chances are it’s good debt.
Now, before incurring these debts you should have a clear and specific reason to do so, and then develop a realistic plan that will allow you to pay them off in the shortest time possible. Furthermore, it is wise to look for the most cost-effective way to borrow this money, to minimize the impact on your future finances.
Examples of Good Debt
Some examples of good debts are as follows:
- Student loans: Taking out a student loan to pay for your university will help you become a graduate, which will likely increase your long-term earning potential. Historically, better-educated workers have access to higher-paying jobs. This investment usually pays for itself in a few years thanks to all the benefits it provides.
- Mortgage: Another example of good debt is a mortgage since it will allow you to buy a house to live in. Once you can pay off your home, it will become one of your most important assets. Plus, the value of your home is likely to increase over time.
- Business investments: Some say “it takes money to make money,” and very often that saying proves to be true. When you are starting your business, you may have to take on significant loans to get your business off the ground successfully. If you manage your business properly, it may become more valuable than the loan you originally took out.
- Vehicle loans: A low-interest auto loan can help you buy a vehicle that allows you to get around without relying on public transportation. If having a car is essential to your day-to-day life, this type of debt will bring you more benefits than disadvantages.
Can Your Good Debt Go Bad?
While good debts bring you long-term benefits, you should not abuse them. Even good debts can turn bad if you don’t manage them properly, or if you borrow more money than you really can repay. Moreover, unexpected situations, such as getting laid off or suffering a medical emergency, can limit your ability to make payments on these debts, turning them into a burden instead of a benefit.
If some of your good debts turned bad, or if you were the victim of an unforeseen situation that limited your earning capacity, you may need to consider options to get rid of your debts. One of the most recommended alternatives to achieve this is bankruptcy. If you want to learn more about the process and its benefits, you should schedule a free consultation with an Anaheim bankruptcy attorney, such as KT Bankruptcy Lawyer, for assistance every step of the way towards a fresh financial start.
What is Bad Debt?
Debts that drain your wealth and drag down your financial situation are known as bad debt. If a debt has variable interest rates, or if what you acquire through debt starts to depreciate right after you buy it, it is most likely bad debt.
Also, if you don’t have a realistic payment plan that allows you to afford your debts, even when they offer a clear immediate benefit, they may be bad debts, since they will end up sinking you deeper and deeper in the long run.
Examples of Bad Debt
Some debts that can negatively affect your finances include the following:
- Excessive Credit Card Debt: Overusing your credit card, especially when it has a very high-interest rate, can end up hurting your finances in a devastating way. If you find yourself using your credit card to buy groceries or other necessities, you may want to rethink your finances to avoid doing so.
- A brand-new expensive car: We all need a car. However, not everyone can afford an expensive car. If you take out a vehicle loan, make sure you use it to buy a car you can actually afford.
- Other luxury items: Sometimes it can be tempting to use your credit card to buy expensive items that you don’t need. Jewelry, expensive clothing, high-end technology, and other luxury items may not impact your finances dramatically from time to time, but if you buy more than you can afford, you’re bound to run into trouble sooner or later.
- Personal loans to pay other debts: If you are at the point where you are borrowing money to pay off other debts, you may need to consult with a bankruptcy lawyer near you to help you break that vicious cycle of debt.
Tips to Avoid Bad Debt
Every time you take on a loan to buy something, ask yourself how this purchase or investment will benefit you. Don’t just think about today, think about the long term. If this debt won’t bring you real benefits, it may be better not to take it and consider other options.
Live within your budget whenever possible. Not spending money you don’t have is a surefire way to avoid unnecessary debt.
Also, it’s a good idea to have an emergency fund to fall back on in case of unexpected events.
And lastly, try to pay your bills on time, all the time.
How to Get Rid of Bad Debt
If it’s already too late, and bad debts are drowning you every month, it may be time to evaluate your options.
Rethinking your finances and limiting your spending may help, but in more extreme cases, you may need to file for bankruptcy to eliminate the bad debts that are dragging you down further and further. To do this, talking to a California bankruptcy attorney may be a good idea.
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