What Is Good & Bad Debt?
All debt is not created equal. Whether debt is good or bad can depend on many factors including what the debt is used for, the terms of the debt, who the debt is with, what type of debt it is, and even the borrower’s own individual circumstances. Good debt often assists the borrower in getting to a better financial position such as a loan to start a business or buy an investment property. Borrowing money for something that is going to decrease in value over time (such as a car, boat, or other luxury items), or borrowing money without a clear and well-thought-out plan to repay the debt suggests that the debt may be bad for the borrower. Whether debt is good or bad is heavily dependent on the borrower’s situation and the weight given to each factor; for example, borrowing money for a holiday is usually bad, but if the borrower’s spouse has terminal cancer, the emotional value, memories made, and time limitations may outweigh the financial burden.
Good Vs Bad Debt
In simple terms, good debt can be thought of as something that increases the borrower’s overall happiness, well-being, and financial position. Of course, there are more than financial considerations to take into account when deciding whether a debt is good or bad. The following factors are important to think about in deciding whether a debt is good or bad (or put another way, whether it’s a good idea to take on debt or not):
- The interest rate applied to the debt;
- Application, processing, documentation or other fees;
- How long the debt is to be paid off over;
- Penalties for repaying the debt early;
- The financial and emotional benefits resulting from taking on the debt versus the financial and emotional cost of taking on the debt; and
- What sacrifices (financial, time, other opportunities, etc) are being made to take on the debt.
Good & Bad Debt Examples
A mortgage (generally speaking) can be thought of as good debt, as a house usually increases in value over time, can provide a safe environment for a growing family (family home), or an additional income stream (investment property). Borrowing money on more favorable terms to pay off existing debt is also an example of good debt (as this may reduce the amount you repay overall). Borrowing money for a car, or a vacation (again, generally speaking) is traditionally seen as bad debt. A car decreases in value, so the money borrowed (interest and principal) is going to be a lot more than the value of the car, especially when the debt is paid off. A holiday can create life-long memories, however, it may be better paid for by saving the money to pay for it, as opposed to incurring debt (and interest).
NEED HELP UNDERSTANDING GOOD & BAD DEBT FOR DEBT RELIEF?
Are you currently in debt or thinking about taking on new debt? Life Streamliner will teach you how to analyze existing or proposed debt to determine whether it is good debt or bad debt, decide what your next steps should be, and guide you through implementing those steps. There are always options to improve a borrower’s situation, no matter the individual circumstances. Life Streamliner specializes in providing guidance on all debt-related matters, including debt relief, debt negotiation strategies, debt restructuring, and alternative options.
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