There’s always been a firm argument that no debt is ever considered good. However, borrowing money in some situations is the only way many people can afford to make extravagant purchases such as buying a home.
While taking on debt to buy a home is totally justified and everyone knows the value it provides to the person taking it. On the other hand, there are other types of debt that are usually taken carelessly, which are considered bad debt.
Let’s put it in simpler terms; Good debt has the potential to enhance your lifestyle permanently or increase your financial value. Bad debt is borrowed money used to fulfil a sense of luxury or to purchase rapidly depreciating assets.
Understanding whether a debt can be good or bad is a rather subjective matter and depends on the financial status of every individual person.
In the following article you will learn about:
Table of Contents
What is good debt?
Let’s just say you need money to make more money! If the money you borrow helps you generate more income and grow your net worth, that is considered positive or good debt. Also if the borrowed money can help you and your family significantly improve in some aspects of your lives, then it can also be considered a good, valuable debt.
Situations where debt delivers more benefits
Education
Generally speaking, the more education you receive, your earning potential increases. Also, more education will make it easier for you to find employment. People who are more educated usually have more chances to be employed in better-paying jobs, and they tend to have less hassle in finding new ones.
Of course, not all degrees represent the same value, but everything mentioned above is generally true about most of them.
Business launch
If you take in debt to start your own business, it is also considered good debt. While being your own boss can usually be both financially and mentally rewarding, you should also consider the hard work. Launching your own business is often risky and requires you to put in a lot of time and effort to make it work.
Many businesses fail to sustain a profitable situation every day. So, you must choose a field that you’re both passionate and knowledgeable about to minify the risks of losing.
Real estate
The simplest way to make money in real estate is to take on debt to buy a home, live in it for a few decades and sell it with profit. While the freedom of having your own home is mentally rewarding, as we move forward its value increases and therefore guarantees the choice you made.
Residential real estate is another choice that can generate money by renting it out. However, you should make sure to do enough research and seek professional help before making this move.
What is bad debt then?
Bad debt is borrowing to buy something that doesn’t go up in value over time, and that can’t generate any sort of money. These types of assets are considered a burden and you shouldn’t go into debt to buy them.
Cars
By the time you make the purchase and leave the lot, the vehicle already loses value and is worth less than what you bought it for. It’s understandable that it might be very difficult to live without a personal car in some countries, borrowing to buy one is always a bad idea.
If you really needed to borrow money to buy a car, then look for a lown with zero to very little interest rate. You will however be paying a large amount of money to buy an asset that loses value over time, but at least you won’t be paying interest on it.
Clothes and consumables
Clothes are usually worth less than half of what they’re priced for, and borrowing money for them is definitely a bad move. It doesn’t mean that you shouldn’t buy clothes or that you don’t need them, it simply means going into debt to buy products such as clothes is not worth it.
Bottom line
Whether borrowing money is good or bad definitely depends on the person and the reason they want to take on debt. Make sure to pay attention to everything as you decided to go into debt. If it adds value to your net worth or helps you generate more money, it’s good!
