For many people, debts are a necessary evil with which one must learn to negotiate. To be able to make the purchase of expensive goods like a house or a car, it is often the only possible financial solution.
In its most basic definition, the debt is portrayed as a sum of money borrowed by one party to another. According to this description, a debt is neither good nor bad. However, in reality, some debts can be considered positive, while others are perceived as negative.
Discover how to tell the difference between good and bad debts.
Debt contracted to help build wealth over the long term is often considered “good”.
For example, a home loan used to pay for a property is a good debt. However, this is provided that you do not pay too high for the building and that the required payments are realistic for your financial situation. A mortgage is often a good debt because most homes or buildings will see their value increase over time.
A student loan, which will allow you to acquire qualifications is also considered a positive debt. In fact, this amount is an investment in your future career, which will help you open up your career prospects and get a better salary.
All in all, good debt will help you manage your finances more effectively, leverage your wealth, buy the expensive things you need and manage emergencies.
Bad debts can include the money you borrow to buy assets whose value will tend to decline over time.
If you are in a precarious financial situation, a loan to finance the purchase of a car could be considered as a bad debt, because the resale value of it will only diminish. It is important to understand, however, that if the car is the only means of transportation that you can use to go to work and get a salary, the debt incurred to get you a vehicle, although it may be considered bad, remains a worthwhile investment. In this case, opt for a model of car whose purchase price is low and which is economical in fuel.
Many people use their credit cards with little thought. However, they can ruin your financial health because their interest rates are often very high. Using these to buy luxury goods is also considered bad debt. This is especially true if you already have several credit cards at their limit and you are unable to repay the minimum amounts required by their issuers.
In conclusion, modern life requires borrowing money at one time or another. However, knowing the difference between good debt and bad debt can have a big impact on your financial health and your chances of success.
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