Good Debt Vs Bad Debt
“It takes as much imagination to create debt as to create income.”
Dictionary.com defines debt as something that is owed or that one is bound to pay to or perform for another. Debt in this context is an amount of money borrowed by one party from another and consequently owed. In this article, we discuss when if at all it is good to borrow and owe and when it is not.
Generally, debt is seen as ‘good’ if it leaves you better off by adding long term value, increases your net worth and helps with generating an income. A good debt should usually not leave a negative impact on your financial position. Some examples of good debt are investing in a business, taking out a student loan or mortgage and buying a car you can afford.
Debt is seen as ‘bad’ if the assets incurred once the money is spent quickly loses value and it doesn’t generate an income. Some examples of bad debt are an unaffordable luxury holiday, a new car that is unaffordable and that’s not needed, borrowing money to pay bills and other credit.
Questions you should ask yourself before borrowing money:
1. Can I afford the monthly repayments?
2. Could I save up for the purchase instead of using credit to pay for it?
3. How much interest will I have to pay? Is the interest rate reasonable?
4. Will the repayment term last longer than the purchase?
5. Is this the most cost-effective type of borrowing?
6. Will borrowing this money help me to achieve my financial goals?
What do you classify as ‘good debt’ and ‘bad debt’? Let us know in the comments below.