What is the Difference Between Good and Bad Debt?

We may hear about good and bad debt and think we know what this means but it is wise to make sure that we really do know what it refers to. It is a good idea to be really sure because it can influence our decision when we are examining loans and thinking about whether they will be right for us. This will help us to make sure that when we do take out a loan that it is the right thing for us to do.

What is Good Debt?

There are a few different ways to define debt. Some people will say that good debt is when you borrow money to buy things which will benefit you financially. This might seem a bit odd, but this could include something like a mortgage where you are buying a home which will enable you to stop paying rent and have somewhere cheaper to live compared with renting for the rest of your life. There are lots of examples and it will depend on your situation sometimes whether a loan will be good for you or not. There are other factors to consider as well when you are choosing a loan though. It is really important to make sure that you pick the right type of loan. When buying a home, it is easy to get the loan type right. However, in many other situations it is not so easy to know. You will need to think about how much you need to borrow and how long you want to borrow it for and that will help you. Then you will be able to pick between them better. It is also really wise to find out how much the loan will cost you and then you will be able to think about whether you feel that it will offer you good value for money. Also look at the repayments and make sure that you are confident that you will be able to afford them.

What is Bad Debt?

So from understanding what good debt is, then it is pretty easy to see what bad debt is. It is when you borrow money for something which will not help you to improve yourself. This could be something like a loan to buy some new jewellery when you already have some that will work for you. Also it is taking on a loan without properly checking that the one that you have chosen is the most suitable for you and that it is a competitive price. Comparing different lenders is a good way to check this out. Then you will need to also find out how much the repayments will be, so that you will be able to work out whether you will be able to afford these. You need to make sure that you actually do some calculations and look at your bank statements to see whether you will actually be able to afford them each month. Perhaps have a back up plan in case you cannot afford them too or else it will be considered to be bad debt.

It is not always that easy to work out whether something is good or bad debt. However, if you can think it all through then you will be able to make a better decision. It is good to take your time and not rush the decision because it can have a big impact on you and this could either be a very positive or a very negative thing. It is therefore worth having a think before you go ahead as it could make a considerable difference to regards to the cost as well as the whole borrowing experience and of course, you may decide not to borrow at all.