You may have often come across the term “good debt” in financial literature. Several financial specialists argue that there is no such thing as “good debt” which can be a marketing strategy pushing you to borrow.
Some debts could be viewed as good, however, one should not give in to their urge to borrow more.
Firstly, Good Debt is defined as debt that fosters a return or generates value. The return must exceed the debt and interest accrued.
For instance, a student loan can bestow a degree upon you that can grant you employment that pays good money and therefore, it is good debt. However, a college degree does not always ensure stable employment or a sustainable income hence, a student loan can be categorized as bed debt.
Another traditionally “good debt” is a mortgage loan. Since property values tend to shoot up over time, your home keeps building value even when you are making payments on it. Again, the issue is that property values do not always necessarily rise. There are certain loopholes in the real estate market (as seen in the 2008 mortgage crash), that can destroy the asset factor of your house. Therefore, a hefty mortgage loan is not good at all times.
Business loans are also perceived ‘good’, as they create an opportunity for any initiator who may not have enough funds at once to start off a business and fuel employment. Taking a business loan is only prudent if consistent profitability is achieved to pay off the loan and retain workers.
Likewise, an auto loan is a good investment helping one attain good credit and opening doors to other borrowing opportunities only if the payments are made on time.
As you can see that every debt has a different side to it. But, this is not to say that all debts are bad however, they are not created equal. A student loan that can potentially get you a remunerative job is still good debt and so is the mortgage that fulfills your home dream.
The above distinction is only to give you a sense of whether it is worth getting into debt or not. If you are aware that you are about to borrow for “bad debt”, thwart it. Preserve your borrowings for adverse times when debt will help you earn a living. Debts other than such should be avoided.
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