Good Debt vs. Bad Debt, Know the Difference

‘Good debt’ (Noun): An investment that will appreciate and / or generate income over time.

Seems that no matter what you do, its always difficult avoiding the debt trap. You could try, but you might never be able to own your own house, car or any other high value item; unless, of course, you have the money available to buy it cash.

According to experts from AllBusiness.com (Is there such a thing as good debt), not all debt is bad for you and there isn’t a reason to live in fear of it. Certain debt is good and is even encouraged. Good debt grows your financial wealth and pushes up your net value, as opposed to its more evil cousin, bad debt. One thing to take into consideration is that if you are in debt you are in serious trouble, and should consider debt management!

We have compiled a list of both good and bad debts for you to look at:

Study Loan

Whether you use the loan to complete a university degree or a short course, study loans are good debts. A proper education will act as a catalyst that’ll enable you to earn a living and have a better quality of life. Moreover, we all know that in order to survive in the competitive job market you need to expand on your qualification.

Home Loan/Bond 

A bond or a home loan is seen as good debt, as it is a secured loan. This means that both you and the creditor (bank, home loan provider etc.) have something to lose. The value of a house appreciates and grows faster than most assets in fact, the value of this investment can grow within mere months.

Car Loan

These days a car really is a necessity, especially given the poor state of our public transportation and the increased crime levels. However, that’s not to say that a vehicle loan is a good debt.  A new car loses value the moment it leaves the showroom floor, which is why it’s recommended to shop around for a reliable used vehicle. If you must get a newer car, rather invest in a cheaper vehicle – a flashy car is nothing but extra expenses on your budget.

Personal Loans

Most personal loans are unsecured and they come with a high interest rate. Even though this is a bad debt, it is not necessarily a bad thing to have, if you’re using it for the right reasons. If you take out a personal loan to remodel or extend your home, the value of your house will increase; or if you use this loan to pay for your studies, you are investing more value in yourself.

Credit Card

Even though a credit card is useful in emergencies, over using it leads to bad debt. Owing too much on your credit card can trip you up and the huge interest charged on them is no joking matter. It’s often wiser to keep your credit card spend to as little as possible and when you do use it, pay it off as soon as possible; as the longer you leave it, the more the interest will be charged on it.

 Retail/Store Accounts

This is referred to as unsecured lending and is a type of bad debt. If not used properly, it can become a financial nightmare!  Before buying clothes on a store card, ask yourself if you really need it.

It may be that as far as you’re concerned debt is debt and it’s all bad, unfortunately, debt (good or bad) is here to stay. However, by taking necessary precautions whilst making use of credit, whether good or bad ,you should be able to keep your name in the clear. You can also consult a debt manager, who can assist by giving you the resources to keep your finances under control.

Be good to debt and debt will be good to you too.

Disclaimer: The information provided in this article is for informational purposes only and do not constitute legal or other professional advice. Hippo Comparative Services (Pty) Ltd does not accept any responsibility for any act, omission, loss, damage or the consequences thereof by the dependence by any person upon the contents of the article.

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