Although most of us cannot live completely debt-free, there are major differences between what is considered “good” and “bad”. Although some debts end up in a little gray area, a good debt is simply defined as money that has been borrowed to pay for items that you really need or that have value, and bad debts are accumulated for items you just want and that are left over generally fall in value.
To help you make this distinction, it is important to be able to distinguish between wishes and needs. In addition, before you borrow money, you must determine whether the money goes to something that has a positive or negative effect on your overall financial situation. In the end, guilt isn’t always bad – it’s how you use it that counts.
1. Borrow money for education
If you take on student loan debts, you rarely make a bad decision. In general, people with a university education tend to make more money during their lives than people without a diploma.
And taking out a student loan to pay for the education of your child defeats the use of your pension to do this. After all, you cannot borrow to pay for your own pension. There are many government programs that offer student loans with low interest rates or interest-free loans, and you can often deduct student loans from your taxes.
2. Pay for medical care
While unpaid medical bills account for more than 60% of US bankruptcies, there is no amount of money worth borrowing to help pay to keep a loved one healthy. You can always pay back money that you borrow, but you cannot replace a human Snarkeven. If someone needs expensive treatments or surgery to regain their health, this is an acceptable debt, anyway.
3. Take out a mortgage with a home
Make no mistake, taking out a loan of this size can be daunting, but buying a house builds ownership in something that not only offers a roof over your head, but is also a potential source of retirement money. And while your endeavors to stay out of debt may be an incentive to use all available cash as a down payment (effectively reducing your monthly payments and interest charges), this may not be the smartest move.
Home mortgage interest is deductible from your taxes and the interest rate is much lower on your home loan than on your credit card, so having cash to pay other expenses instead of using your credit is important.
While buying a home used to be seen as a solid, future-proof investment, some homeowners are upside down on their mortgage loans because they owe more to the banks that are worthy of their homes. But careful planning, only buying what you can afford, and keeping those interest rates low by having a good credit, allows you to buy a house that you actually own in one day.
4. Buy a car
If no public transportation is available in your area, or if you cannot find anyone to go swimming with the car, you should probably buy a car. A car loan can fall between ‘good’ and ‘bad’ in that gray area, but the key to keeping a car loan closer to a good debt rather than bad is to ensure that you have the lowest possible interest on your get a loan. It is also important to bring down as much as possible, while ensuring that you still have cash on hand when you need it.
It is best to buy a late model car instead of a brand new car, which may save you thousands on the sticker price and interest paid during the term of the loan.
5. Business loans
While this is by no means considered a good debt, borrowing money to start or expand a business is generally seen as a good idea, especially when the business is booming. After all, it costs money to make money, right?
Sometimes you have to borrow capital to hire new employees, buy new equipment, pay for advertising or just to make the first run of a new widget you invented. As long as the money is borrowed with a plan to generate more business or income, taking out a business loan is considered a good debt.
1. Credit card debt
The average household in the US has a balance of more than $ 10,000 on their credit cards every month. Credit card debt often accumulates faster than we realize and is often used to pay for things that we would rather have than need . It is much easier to think that we can afford something by using a card instead of paying in cash.
By the time credit cards are paid off, interest rates and minimum payments can turn $ 100 into $ 200 items, and many items are quickly written off in value, increasing the loss considerably. Credit card debt is undoubtedly a bad debt, and one that millions of Americans encounter today. It’s hard to get out of credit card debt and it’s best to avoid it – most Americans should not use credit cards.
2. Borrow from a 401k
When you borrow money from your 401K plan, you must deal with the IRS and unless you use the money to buy a house, you must repay the borrowed money within five years. If you do not repay it when you should, you could be hit by heavy early cancellation fines. In addition, the interest you pay on the loan is effectively taxed twice – first when you pay it and again when you withdraw it during your retirement.
You cannot borrow money to finance your pension. That is why it is a bad idea to borrow money from your pension fund for something other than pension. You stop your pension when you borrow from a 401k, so don’t do it unless it’s absolutely necessary.
3. Holidays, jewelry and expensive clothing
If you can’t afford to afford this luxury with cash on hand, don’t do it. These are not needs but wishes and therefore bad debts. Wait until you have the money to pay for them. Leaving just to pay for a vacation or a handbag is definitely a terrible use of borrowed money.
4. Payday loans
It may be easy to borrow money from companies that provide payday loans, but it is very difficult to repay them. These companies lend money with frighteningly high interest rates, taking advantage of the fact that many people are desperately looking for cash. Even a small amount borrowed through a payday loan can eventually cost a small fortune if it is eventually repaid.
Payday loans are often regarded as the worst form of debt that you can incur. If you need a short loan, it’s better to take an advance on a credit card than to borrow money from these companies.
Modern life requires that many of us borrow money at one time or another. But knowing the difference between good and bad debts can have major consequences for your financial health and the chance of success.
It is best not to incur more debt than you can comfortably afford to pay back, regardless of whether it is good or bad. Also ensure that the debt does not exceed 36% of your total gross income, as credit institutions do not distinguish between good and bad debts when determining your credit score and creditworthiness. If you find yourself too deep in the red, look for ways to make your debts disappear and get back on track.
Don’t be afraid of debts as a general concept. Instead, use it as a tool to improve your life or financial situation, increase your income, or invest in your future.
What types of debts have helped you improve your finances and your life? What do you think is the worst form of debt you must assume?
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