What’s the Difference Between Good and Bad Debts

What’s the Difference Between Good and Bad Debts

Not all debts are bad. There are debts that allow you to augment existing capital or spread the costs of long-term "assets", enabling you to own a property or investment that you would otherwise have to wait for for years if the only option is to save up for it. However, too much of a good thing can be a bad thing, especially if you take on too much bad debts.

But how do you know if a debt is still beneficial or is already falling into the bad debts category? Let us help you with that. In this blog, we discuss the difference between good and bad debts and cite some examples of each.

Good Debt vs Bad Debt

Simply put, a good debt helps enhance your net worth, generate revenue, or has future value. The classic saying "it takes money to create money" often applies to good debt. You loan money for the purposes of investing it or making your life better without giving you another additional financial stress.

SBad debt is also not difficult to recognise. If you're borrowing to buy a depreciating asset or something that would lose its value over time, it's usually considered as bad debt. To put it another way, if it won't increase in value or provide money, you shouldn't put yourself into debt to buy it. Unfortunately, many of life's fundamental necessities, such as clothing, transportation, and the latest gadgets, can fall into this category.

A debt is also considered bad if it tempts you to spend money you set aside for more important things. Plus, when the loan's terms surpass the asset's value or usability, you should know that it’s a bad debt. For example, if you've only been able to utilise a car for three years but your loan term is five years.

Examples of Good Debt

1) Business loans

You need money to start or grow a business. While some entrepreneurs are lucky enough to support their businesses with their own money, some need help with loans from friends, family and even trusted lenders. Business loans are generally considered as good debt because it helps generate revenue and augment income.

2) Home loans

A home loan is considered a good debt because a house has long-term value and can be a revenue-generating asset when sold or rented out. Your ability to maintain monthly payments can also be a sign of good credit use.

3) Educational loans

As they say, education is like investing in yourself. Money borrowed for educational purposes is considered good debt because it is believed that there’s a higher earning potential the more education you get. Statistically, education has a favourable impact on one's capacity to find work, and workers with a higher level of education are more likely to be employed in well-paying positions and have an easier time finding new ones if the need arises. Also, within a few years of entering the workforce, a college or technical degree can often pay for itself.

Examples of Bad Debt

1) Car loans

While not all car loans are bad, borrowing money to purchase a car is generally not considered as a good financial decision because its value depreciates over time. In fact, it is believed that a car is already worth less than when you bought it when you leave the lot. So if you need to borrow money to buy a car, seek a. low-interest loan.

2) Credit related to clothing and other consumables

We all need clothes, food, furniture and other consumables. However, it is not advisable to get them using a high-interest credit card. For one, this may encourage unhealthy expenditure plus, it’s always better to pay them in cash so you can save on interest and keep your expenses on track.

What about other debts not listed here?

Debt isn't always easy to categorise as good or bad. More often than not, your debts are determined by your own financial status as well as other variables. Certain types of loans such as borrowing to pay another debt may be beneficial to some people and not to others.

Let us help you find the right finance products for you

At Fastgrow Finance, we understand your goals and situation carefully to provide you the best solutions that suit your budget. If you need any type of loan, feel free to contact us. Our experienced brokers will work with you to find a lender that’s perfect for you.

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