Can Debt Be Good or Bad?

What’s the difference between good or bad debt? Read on to understand the differences.

Debt is one of those financial terms that has suffered a lackluster reputation for a long time. 

Nobody wants to be deep in debt. And, even if one is ever indebted, the general go-to advice would be to pay off these ‘financial burdens’ as soon as possible before loan interests rack up.

The reality is that incurring debt is a natural order of everyday life in the modern world. 

Made a significant purchase for home renovations, or require urgent funds for emergencies? Taking a loan is often the best choice available to you, especially if the sum of money is not immediately available at that point of time. That would result in the borrower being in debt. 

Yet, this debt can be categorised as ‘good’ or ‘bad’ depending on the purpose of the loan. 

To be sure, having debt is ultimately useful when managing cash flows, especially when it frees up other currently available funds for other daily, crucial needs. 

While these terms – good debts and bad debts – can be confusing in coming to terms with being indebted, they are useful in thinking ahead about your finances too.

The Value of Good Debt

Good debt is incurred when you take a loan for the purposes of building wealth or increasing income. In essence, it is debt that acts like an investment and adds value to you over time. 

Such examples include education loans for further studies, which can increase the student’s chances of earning a regular salary or to create money-making opportunities. Mortgages are also another common example of good debts as property prices may increase in value over time and have the potential to be worth more than the initial sum borrowed. 

Business loans used for operational expenses or further business expansions are also under this category of debt as these provide windows to earn profit – if the business is managed well!

Is Bad Debt Really That Bad?

The short answer is ‘no,’ it is not as terrible as it sounds. But, it is debt that does little to improve your financial outcomes or depreciates in value. 

Have you been using your credit card regularly? Credit card debt is a common example of bad debt, especially since it does not offer monetary gains and also comes accompanied by high interest rates if not paid on time. Buy Now, Pay Later schemes follow the same sentiment, especially when used for consumables like clothing. 

Car loans, particularly for personal use vehicles, are infamous examples of bad debt. Since cars are worth less than their original value (or the amount loaned) in time, car owners do not gain any returns even upon selling said vehicle. 

These bad debts are unavoidable to most, but they are inherently helpful. Credit cards, after all, offer extra funds on hand for important necessities such as groceries or essential bills. A car, to many others, serves as an essential expense that offers priceless convenience to everyday life.

Debt: Burden or Benefit?

There are many reasons why you will need to borrow money, but these loans should ultimately work in your interest or help you as opposed to becoming obstacles. 

Will the loan pay you back more than you put in? And, can you get more potential from your money in other situations? Ultimately, it depends on you to turn this ‘financial burden’ into long-term benefits.