Good Debt Vs Bad Debt- What's The Difference?

Monday, February 13, 2017


Most of us have to borrow money at one point or another in our lives. Whether it’s to buy a home, a car, to study or for something else- there’s no doubt that lending can be extremely useful if it’s done in the right way. But other forms of debt can be a slippery slope, many people can find themselves in a position of becoming over committed, ‘robbing Peter to pay pay Paul’ and with so much interest that their monthly payments aren’t even taking money off the debt itself. But what exactly is good vs bad debt? Here are some of the ways you can tell the difference.

Examples of Good Debt
Good debt lending money for an investment that will grow in value or generate long-term income. If you get a mortgage for house for example, not only do you save wasting money on rent each month but houses tend to increase in value as the years go on. Your own home can give you financial stability and is a solid, worthwhile asset to have. Financing a car can also be an example of good debt, it allows you to own a newer and more reliable car than you could afford to buy up front. This means less repair bills, and in some cases can be the difference between being able to own and car and not having one at all. You car gives you independence and might also mean you can take jobs further afield, giving you better opportunities. Money for study is another perfect example. It could be government student loans for university, or a personal loan you’ve taken out from a company like Money Boat to cover a college course. Education will increase your chances of getting a job (or a better paid job) so is a worthwhile investment. 

Examples of Bad Debt
Bad debt comes about when people spend money they don’t have. Luxury purchases such as holidays, clothes on store cards and general spending on credit aren’t usually a good idea. When you have access to a lot of credit, it can be tempting to buy things there and then rather than saving up your own money or waiting until payday. It usually starts off innocently enough, but can spiral quite quickly and land you in a heap of trouble.

Where The Lines Get Blurry
The problem in life is that things are never entirely black and white. There are definitely some grey areas and blurred lines when it comes to good and bad debt. Take the car mentioned earlier for example- in some cases financing a car is an example of good debt. But if you’re financing that car just because you want a better or newer model (or can get around easily on foot or public transport) then it becomes just a luxury purchase. Expensive holidays might seem like a frivalous purchase, but what about using credit to fund the holiday of a lifetime? The memories and joy it could give your family might justify it as good debt. Use common sense, work out a budget and a spending plan which will help you keep on top of your finances.

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