Debt is unavoidable. All of us have debts. For some people, the debts are simple obligations like utility bills. For many, it would be a credit card bill. From mortgage to paying back the student loan, people have myriad types of debts. It is almost impossible to avoid debts. Even the billionaires of the world have humongous business loans to repay. They continue to persist with those debts because they are necessary and they haven’t turned into bad debts.
There is good debt and there is bad debt. You cannot and should not avoid good debt. Let us explore the simple differences between bad debt and good debt.
- A home loan or mortgage is a good debt. You have bought a house or apartment. It is a tangible asset and would offer generous returns in the future. Unless you have purchased a property that no one would buy, you will almost always make money when you choose to sell the house or apartment.
- Bad debt is any loan that is unnecessary, is hitting your finances hard and may be getting unmanageable – those debts which are liabilities rather than assets. Skyrocketing credit card debt is bad because it is not necessarily leading to tangible assets and you would be paying high rates of interest. Personal loans and unsecured loans are also bad debts if you don’t have a very reasonable purpose. Allowing utility bills and other financial obligations to build up would also qualify as bad debts. You would have to pay penalties that are avoidable and your credit history could take a hit.
There are grey areas when it comes to good debt and bad debt. A car loan is neither good nor bad. Since cars are depreciating assets, you are better off purchasing one with a down payment or in cash. But if you don’t have enough cash or don’t want to use it up, then you need a loan.
It is not necessary to make debts complicated. Necessary debt with reasonable interests and when it is manageable is good debt. Any debt that is needless, demands high interests and becomes a burden is bad debt.