Good debt v Bad debt

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Debt has negative connotations and as a  general rule of thumb no body wants to be in debt. When you have debt, you have an obligation to pay a creditor(s) which maybe someone, or as in most instances it is a bank, a higher amount of money than what you initially borrowed. Therefore debt can be a considerably costly expense and burden. However, not all debt is equal, some of it is good and some of it is bad.

Debt can be categorised into two broad categories, short term debt and long term debt, and within these categories debt can be further categorised as good and bad debt. Unfortunately the statistics show us that when debt is poorly used and managed it can easily become bad debt. Bad debt, also can be the result of getting “dumb debt” in the first place. Dumb debt is the debt people acquire to buy stupid things like new clothes, gadgets (televisions, phones), cars etc.. No matter how much you try to convince yourself these are not necessities, and most of the time people only buy them to impress other people. That said there is nothing wrong with wanting to have the finer things in life, just do not buy yourself these things with debt. You will just be setting yourself up for failure if you do this ,especially if you start doing it when you are young. None of these things add any value to your life and definitely what ever benefit you think they will bring , it does not exceed the interest rate you will have to pay on these respective items. 

This is the main thing that distinguishes good debt from bad debt. Good debt , is when you take out a loan to start a venture that will generate profits that outweigh the cost of the debt. So for example if you take a debt to expand your successful business, that would fall within the realms of a good debt. The potential  pay off from this would outweigh the cost of taking out the debt. Let’s contrast this with you taking out a loan to purchase a car. As soon as you drive the car outside of the dealership, the value of the car has depreciated, meaning that under no circumstance can you recover the amount you paid for the car by reselling it. Meanwhile the amount you owe on the car has increased because of the subsequent interest you have to pay on the car loan.

Whether it is good or bad debt you still carry a certain risk when taking out a loan. You may not be able to pay back  debt and this may have other negative implications and effects to your life. The ideal situation is that you never have to take out any loans. If you effectively save you  will have sufficient savings that can cushion you during tough times. 

2 COMMENTS

  1. Thanks for the sensible critique. Me and my neighbor were just preparing to do some research on this. We got a grab a book from our area library but I think I learned more clear from this post. I am very glad to see such great information being shared freely out there.

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