You may have heard the expressions good debt and bad debt but wondered about them. Some people may think that all debt is good because it gives them extra money to spend. Some people might think that all debt is bad because it costs money and causes them stress. However, there are those that split debt into good and bad debt. This can make it much easier, when you are thinking about whether to borrow, to decide whether you should be borrowing the money or not.
What is Good Debt?
Good debt is decided by a few different factors. The first is whether the money will help you to better yourself. For example, a student loan would be considered to be good debt as you are using it to pay for an education which should allow you to earn more money in the future. A mortgage would also normally be considered to be good debt because you will use it to pay for somewhere to live so that you will not have to pay rent in the future and it will be worth more money in the future than you paid for it.
However, there are other things that you need to consider as well. Firstly, you need to make sure that you are using the right sort of loan. The two examples above are specific loans that only have one purpose, but many loans are general and can be used for different things, so it is important to pick the right one. It is also a good idea to make sure that you compare the prices between the different lenders that offer this type of loan. You will find that their charges will vary a lot and you will need to make sure that you are not paying more than necessary. Lastly, you should check that you will be able to cover the cost of the repayments.
What is Bad Debt?
Bad debt is when you borrow money for something which will not help you to better yourself. So, borrowing money to buy things that you do not really need or borrowing to pay for things that you can afford using money you have already. An example of this could be borrowing money to pay to update some cushions or curtains, when the ones you have are perfectly adequate or borrowing money to pay for a big Christmas party, when you could manage without one.
Also, if you take out the wrong sort of loan, so that it costs you more money than necessary and use an expensive lender that does not offer you good value for money. So, you may choose a loan, where you borrow a lot more money than you need, for example and then it will take longer to repay and cost you more. You may also not compare lenders and therefore go with one that does not offer good value for money. Lastly, if you take out a loan with repayments so high that you will not be able to afford them.
So, as you can see, there are two main aspects to good and bad debt. One is the purpose of your borrowing and making sure that it is useful. The other is making sure that the loan is not too expensive and that you can afford it. It is not always easy to decide which your potential borrowing fits in to. However, it is a good idea to give it some serious thought and maybe discuss it with someone else before you decide whether you should borrow the money or not. Try to avoid bad debt but take advantage of good debt wherever you can.