The difference between good debt and bad debt

Debt happens to everyone. Surprisingly, there is such a thing as good debt and then there are those on the opposite side of the spectrum that could lead to even graver situations.  It is therefore imperative to know the difference between good and bad debts to help you determine what kind is best for you and which option can provide you the best possible solution to your financial needs.

Good debts are those transactions that give you more wealth and value in the long run. Some examples of good debt are student loans, real estate and business loans. Good debts are sensible choices in terms of investment. You get something that you really need as you take it out, and you must be sure to pay back these loans as quick as possible. Also, some loans are deductible from your taxes, which makes them easier to pay.

Mortgage loans are an example of good debt. Why? This is because when you take out a mortgage loan and purchase a home, you gain a valuable financial asset. Just make sure you pay the mortgage loan, because after you have paid it off, the value of the property you acquired may increase over time. Moreover, should you decide to sell this property in the future, there is a possibility that you gain more profit.

Now, bad debts are what you should avoid. Put that spending urge on total lockdown, since bad debts are all about unreasonable purchases and bills. Bad debts will stack up, and before you know it, you'll be in much deeper financial situation.

Bad debts are basically loans people get even if they do not have the capacity to pay the amount they borrowed plus the interest until the bills are due. So, simply put, any loan you cannot afford to pay is a bad debt.

People who could not control their budget and end up spending unnecessarily on things they do not need and cannot afford, are the ones most likely to have bad debts. For example, a car loan-- especially when you don't really need it. The value of cars deteriorate year on year, and if you are in a tight situation and end up not being able to pay for the loan, that means you won't get the car and you also have an amount of interest piling up to be paid. Other examples would be purchase of luxury items that you do not need. They are called luxury for a reason, not to be acquired if your means can’t accommodate for them.

So when it comes to your finances, choose wisely and implement self-control. Always prioritize needs over wants.