In order to afford big ticket items, such as homes and cars, most of us need to take out a loan. There are two types of debt, good and bad. In this article, we define what both of these terms are.
Good debt is a loan that you invest into something that will grow and give you returns on your investment in the future, such as shares.
Another example is a mortgage, as your property will increase in value over time and provide you with yield. Investing in good loans will reward you over time, as your initial investment will grow.
Bad debt is a loan that you spend on something that is depreciating and won’t give you a return in the future. Examples are credit cards, cars and vacations.
Even though you are receiving the benefits instantly, such as a new car or going on vacation, these loans cost you more money over the long term. Next time you are considering using your credit card or taking out a holiday loan, think twice about how much it’s going to cost you in the future.
How do we know whether a loan is a good or bad debt?
A question you need to ask yourself when you take out a loan is; overtime, will this pay me back more than what I originally borrowed? If the answer is yes, then you are investing in a good loan. If the answer is no, then you might want to reconsider if this investment is really worth paying more for in the future.
Overall, not all loans can be easily segmented into the good or bad category. Someone’s good debt maybe someone else’s bad debt. It all depends on your own financial situation and other factors to determine whether your loan is good or bad for you.