There are some people that feel that all debt is bad and some that feel it all has its place, however, many people do not know the difference between good and bad debt. If asked, perhaps many may say that credit cards, overdrafts and short term loans would be bad debt and mortgages good debt, but it is not so easy as that to classify debt.
Good Debt – This is debt that will give you positive results. A mortgage would normally be good debt as it will pay for a property that should increase in value more than the cost of the debt. A student loan could also be in this category as it should enable the borrower to get higher wages as a result and it will also be written off after thirty years even if none has been paid back. Repayments have to only be made if earnings are above a certain amount.
Bad debt – This is debt where you borrow money for no good reason. This might be where you have a store card or credit card and accidentally forget to pay off the full balance and so end up paying interest in it. It could be using an overdraft when there are cheaper alternatives and things like that.
However, with many types of debts, it is not easy to classify them. A loan to buy a second hand car could be frowned upon, but if that car was to take someone to work each day and without it they would have no salary, then it may be seen as good. Normally with all borrowing there is good and bad things about it.
Obviously the cost and commitment are disadvantages but the freedom that it can give you can make it worth it. Each person considering a loan will need to consider their own situation and whether that particular loan will be good for them. It is therefore a decision that will take a lot of thought. Even a seemingly good loan may not work out as if you cannot keep up the repayments then you will get in to difficulty. They also cost money, even if they are competitive and you get more in return than you would have without the loan. So there is always going to be an element of risk and you need to decide whether that risk is something that you are prepared to take or not.
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