Good debt versus bad debt Before you borrow money, it’s important to know the difference between good debt and bad debt. Some purchases are worth going into debt for, others can leave you in an exceedingly big financial disorder. Here’s a way to tell the difference.
What is good debt? In simple terms, good debt could be a sensible investment in your financial future. This should leave you happier within the long-term, and will not negatively impact your overall financial position. You will have a transparent and specific reason for taking it out, and a proper plan for paying it back that enables you to clear your debt as quickly as possible, or in a series of standard and affordable payments. Someone with a decent debt will also have identified the most affordable way of borrowing that money. You will have to do this by finding the right borrowing method, an interest rate, loan or credit amount, term, and charges that are the foremost appropriate for them.
In some cases, it will clearly mean an agreement with the lowest possible interest rate, but in others, it might not.
What is bad debt? Bad debts are those who drain your wealth, are not affordable, and offer no real prospect of paying for completing them in the future. Bad debts also are likely to have no realistic repayment plans and are often run up when people make impulse purchases of items they don’t really want or borrow money to pay everyday bills. If you can’t find the money for paying your debt, then it is definitely a bad debt.
Examples of bad debt Here are some cases you should think seriously about getting into debt for. ● If you can’t pay the debt off in the very short term, it’s possibly better to not spend the money.
● A luxury holiday you can’t afford to pay: a luxury holiday can be a dream voyage but is best avoided if it’s accompanied by a lifetime of debt. Instead of getting into debt, try and save up first, if necessary try to rework your plans so you'll be able to take a holiday, but once you are able to afford it. ● You don't need a new car: If you don’t need to buy a new car, think twice about it. Vehicles tend to lose their value and if you lost your job and you couldn’t complete the repayments. That means you’d have no car but an unsettled debt to pay. ● Borrowing money to pay bills and or other credit: if you’re struggling to get to the end of the month you can get free confidential advice, which is able to facilitate your finances in the right direction. Once you have established that the money you want to borrow is good debt, you need to figure out exactly how much to borrow and how you’re planning to pay it back. Borrowing more than you need without a plan for paying it back, can swiftly turn a decent debt bad.