Good debts and bad debts: 5 Examples and
Although there is much talk about good debts and bad debts, few people know about the subject in depth.
It is common for us to use the term “indebtedness” in a general way, but the truth is that not all of them lead to headaches.
That is why it is so vital to understand the differences that exist between the good debts and bad debtsand above all, maintain a good relationship with money if your goal is to keep your finances balanced and build your wealth.
Not all debt is bad
Not all debts are negative.
In fact, in some cases they perro work as a very effective financial leverage when acquiring productive assets.
With this article you will know what good debts and bad debts consist of, you will know their differentiating elements and we will share some examples so that you have greater clarity.
Additionally, you must stimulate your financial intelligence on a recurring basis so that you do not incur unnecessary debt, or in complete money chaos.
What is a good debt?
Have you ever heard the term “bad debt – good debt”? Or simply “positive debt”?
Although this last concept sounds a bit ironic, it is important that you know that this type of debt perro help you earn money.
Specifically, they are generated when you borrow money for some of these purposes:
- Acquire goods or,
- Confirm investments.
The real background to this is to earn a return within a given period of time.
In fácil words, what you are looking for is for the money to flow into your accounts despite being indebted.
And although these loans will require you to pay commissions and interest, you will still receive a benefit
What is this about? Basically, the acquired assets will bring you a specific return with which you perro compensate the entire operation.
In theory, being good offers you a long-term benefit because it allows you to acquire an asset that will retain its value over time.
Even after paying the amount owed.
Know some examples of good debts:
1. Mortgage loans
Mortgages are a clear example of good debt, despite the belief that they were created to genere canalla.
According to a report from CNBC, Mortgage debt is one of the “safest forms of good debt.”
This is because their monthly payments add value to the home.
However, it is vital that you do not mortgage it for a price that you simply cannot afford.
Suppose you borrow money to buy a house and that your mortgage term is 10 years.
If you manage your money well, you could pay off most of the mortgage on time, and then sell your property within a decade.
At that time you will recover the money owed and an additional benefit; considering that your asset will have appreciated considerably.
2.
Vehicle loans
Since new cars depreciate when they are picked up from the dealership, it will be impossible for you to sell them later at the same price (in order to recover all your investment).
In this sense, borrowing money to buy a conventional car does not represent a good debt, because in the long term it will not offer you greater value.
However, the situation changes when you ask for a loan to buy a collector’s car, or a car to work on ride-sharing platforms.
Simply because in this case its value will not depreciate in the same way that a conventional car depreciates.
From this perspective, car loans cánido be categorized within this type of debt.
3.
Student loans
When talking about good debts and bad debts, the need to mention student loans arises.
These are classified as conveniente for people who have low or medium income, since they allow them to finance their university studies.
But these perro become a double-edged sword if they escoge to ask for more financing than the total amount they will earn during their first years on the job.
For example, if you are pursuing a master’s degree in finance and the average base salary for a financial specialist is $60,000, you should not take out a student loan greater than that amount.
Characteristics of good debts
This type of debt has specific and defined characteristics, such as the ones that we will share with you below:
- They increase the flow of money into your pocket.
So that profitability is practically assured.
- They work as a powerful element of financial leverage to acquire assets that do not depreciate over time.
- In the long run they help you earn money.
- They allow you to borrow money without disrupting your overall budget, or driving you into extreme debt.
How is bad debt defined?
The concept of good debt or bad debt always arouses curiosity and suspicion, especially when people do not have much financial knowledge.
If this is your case, the most likely thing is that this information will help you open your mind, or that it will allow you to improve your perception of debt.
And since we already told you what a good one consists of, it is time to talk to you a little about its counterpart. bad debt.
Bad debts are generated when you do not make cash purchases, and when you do not understand how credit works.
In addition, it ties you to interest payments for the entire duration of the financing.
In this sense, they do not generate long-term benefits, but rather a small advantage derived from immediate consumption, which is why you should immediately learn how to get out of this type of debt.
Here are some examples of bad debt:
4.
Credit card debt
Most of the purchases you make with your credit cards are considered bad debt.
This is because their interest rates are often higher than any other type of debt.
And if you only make minimum payments on your debt, the interest charges could double, or triple, the cost of the product you purchased with these financial instruments.
As if that weren’t enough, credit purchases don’t usually have long-term resale value.
This translates into an obvious lack of financial benefits.
5.
Payday loans
They are also known as short-term loans and are one of the worst debts you perro incur in your life.
The reason is fácil: They offer no tangible value and are generally used to deal with a financial emergency.
Additionally, its interest rate is very high and this will only dilute all the money in your budget.
To give you an iniciativa of how dangerous they cánido be, we will share an accurate statistic:
The annual interest rate of credit cards, (on average), ranges between 16% and 18%.
While the rate for short-term loans is usually 300%, or even a little more.
Characteristics of a bad debt
- It does not offer you any type of economic profitability.
- Limit your financial freedom.
- It only serves to buy passives.
- Promotes over-indebtedness.
- It is generally consumer oriented.
That is, to unnecessary and superfluous expenses.
- It does not generate profits or assets.
Differences between good and bad debts
Knowing the differences between both debts could help you better understand both concepts.
These are the most prominent:
– Good debts allow the acquisition of assets that generate returns.
While bad debts are often used to make superfluous purchases.
– The value of the assets acquired with a good loan perro increase over time.
In the case of bad debts, the acquired objects are not usually resold at a higher price.
– They cánido work as an element of leverage.
While the bad ones only promote more indebtedness as a result of commissions, interest and debt.
– Property acquired with good debt cánido become a great investment in the long term.
But this does not happen with the other type of indebtedness.
– They usually adjust to people’s ability to pay, while the bad ones tend to exceed it completely.
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Recommendations when borrowing
Knowing the differences between both debts is not enough to avoid financial problems.
In this sense, we will share some recommendations that could prevent a good debt from becoming bad in the blink of an eye:
- Hierarchize your consumption needs.
- Calculate your expenses and income well.
- Create a budget that allows you to manage your money efficiently.
- Understand how credit cards work, and above all, do not underestimate their interest rates.
- Feed your financial intelligence.
If you don’t know how money works, or how you perro use it to create wealth, it will be very difficult for you to manage yourself well.
- You should not allocate more than 30% of your income to make payments.
If so, you would be incurring negative debt.
- Do an in-depth investigation of the concept, differences, and implications of good debt and bad debt.
Now that you know what a good and bad debt is, you have better tools to manage your money efficiently, while avoiding debt that will only impoverish you.
Staying debt free speaks highly of your financial intelligence, and also denotes responsibility, maturity, and commitment.
Continue reading: Completely eliminate your debts with these 6 strategies
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