Loans - Good or Bad Debt?
When borrowing money it is usually because we lack the cash to make a large purchase, such as for a car, home or education. However, an important question to ask yourself when borrowing is if the purchase you would like to make is creating good debt or bad debt.
Good debt is considered borrowing for something that will go up in value over time. For example, real estate, a business or for education purposes. Education loans can be considered good debt because it should increase your income.
Bad debt is debt used to fund something that doesn't hold its value. Some examples would be car loans, personal loans for vacations and use of credit cards for consumable products.
Additionally, loans for bad debt are not generally good for your financial well-being because they usually have higher interest rates and are not tax deductible. Good debt loans on the other hand are frequently tax deductible and carry lower interest rates.
Ideally having no bad debt is the best. However, in some cases a certain amount of bad debt may be ok and unavoidable.
So, just remember to take into consideration the type of debt (good or bad) you are incurring prior to getting a loan. This advice can go a long way toward helping you be a financially savvy borrower.