Debt Personal Finance Wallet

Good Debt vs. Bad Debt: Is There a Difference?

When you think of money, what are some of the things that come to mind? It might be coins, paper, or perhaps even a classic look of a piggy bank. More modern images might conjure up things of plastic credit cards, but it is unlikely to bring up images and ideas of things like debt; how would you even sum that all up in an image? Debt is something that is an everyday norm, but it isn’t something that physically exists. Just like money, debt is only something that exists because it has been given a value by society. So the question asks, if it isn’t a tangible thing, then how is it something that is created?

While it is quite possible to live life in a way that is completely debt-free, it isn’t necessarily always a smart thing to do. There won’t be many people that earn enough to pay for everything needed in life for cash, such as homes, cars, and education. So there are definitely some ways that ‘getting into debt’ can be a good thing. Which brings up something called good debt and bad debt. But what is the difference?

Good Debt
Good debt is something that can be seen as an investment, as it can grow in value or be something that can help to generate a long-term income. For example, a long term secured loans from Evolution Money could be seen as good debt as it could be for adding value to the home through something like a loft conversion perhaps. Good debt could also be seen as something like taking out student loans so that you are able to pay for a college education. You are educating yourself and investing in your future, so it can be a good example of good debt.

Debt Personal Finance Wallet

Buying a car with a loan or with a specific car loan can also be another example of good debt. This can be especially true if you are using the car for business. Homes and adding value to your home is something that keeps adding value; cars don’t necessarily keep their value. So if you are buying on credit, then it is such a good idea to pay as much up front as you can, so that your repayments are less over time (especially if it is something that has high-interest monthly repayments).

Bad Debt
So if those are a few examples of good debt, then what are the examples of bad debt? Bad debt can be seen as debt that is incurred to buy things that can quickly lose their value and aren’t things that generate long-term income. There are often high-interest rates associated with bad debt, which is another reason to avoid. So the rule to go by is that if you don’t really need it, can’t afford it, then don’t buy it. So as much as you might want that designer pair of shoes, if you have to buy it with a payday loan, then you will end up paying way more than they are worth.

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