Residents of the North Star State who need cash fast, can get an auto title loan In Minneapolis. But, was that “good” debt? It was if you took on the loan to achieve meaningful growth in your finances or personal life. By contrast, bad debt is relatively expensive debt that you incur for unnecessary expenses. Keep reading for more on bad debt vs. good debt. Which one yours is depends on the situation, including your stomach for risk.
What is Bad Debt?
Borrowing money to purchase a depreciating asset is generally considered bad debt. Such debt typically carries a high interest rate. A prime example is high-interest credit card debt. Excessive debt can damage your credit rating. Another example of bad debt is debt used to pay for a vacation. Even if you have a blast, you’ll have little tangible remaining to show for it when you return home. If you must borrow money for a trip, be certain to repay it as soon as possible.
Another bad idea is borrowing to purchase a boat, which is a depreciating asset. While they can be quite pleasurable, these crafts swiftly lose their value. They also require other expenses.
You can also add vehicles to the category of bad debt, since they’re also depreciating assets. You may have heard the oft-repeated declaration: your car loses value the second it leaves the lot. Well, it’s true. Auto loans are still common, however, and you may be able to get a rate that’s lower than a personal loan. Still, it’s best to avoid taking on debt to buy a vehicle. If that’s not doable, try to get a lob with a low rate and minimal fees.
Further, you also shouldn’t pull out the plastic for furniture, clothing, or food or other consumables, since you’re paying high interest. Paying in cash is much better. If you must use a credit card, be sure you can clear the debt by month’s end.
What is Good Debt?
Generally, good debt is that which helps you to produce wealth or generate income. It can benefit your overall financial health.
For example, because the average person lacks the cash to purchase a home, they commonly take out a mortgage loan. Rather than make payments to a rental property agency, your loan payments will go toward building a property asset. At length, you can sell the house for a profit. And in the meantime, you’re piling up equity that can provide tax breaks. Renting your real estate out is another option.
Education is another example of good debt, as it is generally associated with an increased ability to find better-paying employment. In this way, such an investment really pays for itself. Do note, however, that some degrees may carry more value than others, depending on the sector and demand. Remember that, when selecting your field of study.
Other good debt includes borrowing cash to start a business. Business ventures are still risky, though. However, if your business is a success, the debt will have been well worth it.
In Summary
Most people consider being debt-free an ideal situation. And they’re generally not wrong. There are circumstances, however, in which debt can help you to produce wealth. On the other hand, bad debt is cash borrowed to purchase assets that quickly depreciate, or to buy consumables. Be certain you get the difference.
