In the world of personal finance, “debt” has a negative perception. However, not all debt is necessarily destructive for you. The answer is a bit more involved; some forms of borrowing can actually create wealth while others pose a more stealth risk to your financial health.
Reducing your chance of financial stress in the long run and making informed decisions about borrowing starts with understanding good debt vs bad debt.
Understanding debt
Simply put, in essence debt is money that is borrowed, which you pledge to pay back over a period, usually with interest. Whether this borrowed money is good debt or bad debt, it depends on how it is used and any terms attached to it.
What is good debt?
Good debt is borrowing money to purchase something that can either appreciate in value, or provide some ongoing income. It is an investment in your future.
What is bad debt?
Bad debt refers to borrowing money for assets that depreciate rapidly or have little long-term benefits. Typically, bad debt has no financial returns and high interest rates.
Is all debt bad?
A lot of people wrongly think that the best thing to do is avoid debt altogether. However, smart debt can accelerate financial growth, generate opportunities and build credit. The essential thing is to determine if the debt helps to reach your goals or is simply for short-term gain.
In conclusion, while bad debt may become a liability if not handled well, good debt, when used wisely, can be a pathway to financially empowered consumers. Financial literacy, reasonable debt, and frugal spending can free the person from bad debt. Getting borrowing to ‘work for you’ begins with understanding the fine distinctions between good debt and bad debt.
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