Home Financials Differences Between Good Debt vs. Bad Debt – 2020 Guide

Differences Between Good Debt vs. Bad Debt – 2020 Guide

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Source: financialnet.com.au

Many people will say there is nothing good in borrowing money and have a debt to some bank or agency. The truth is that we can really separate the types of debt in bad and good, depending on the purpose they are taken for. For example, student debts are good, because young people are investing in their bright future, which will later help them earn enough money to pay back the loans. On the other hand, people who borrow money so they can maintain some luxurious lifestyle, they are those who have bad debts, because they don’t do anything useful for their better life or future.

The second group is usually spending money without taking care about the amounts, thinking they have all the time in the world to earn and pay back them. But, the truth is they can easily adapt to that so-called high-level way of living, and nothing is ever enough for them. So, we can say those good debts are the ones who are helping the client to increase their worth and live a comfortable life without thinking they need luxurious and expensive items about that. When people borrow money for things that are not really useful, they are getting in bad debts, which is a cycle of asking for more, so they can cover their previous loans.

In order to understand better the difference, we will try to explain every aspect of both types, and then you’ll be able to decide if it’s worth borrowing money for something you don’t really need to survive or not.

Good debts

These are the debts that, simply said, you use to invest in yourself so you can learn some skills or use the money to make more money, which will result in profit. You can also check CreditAction.co.uk so you can understand better every side of this story, or just to plan the money you have for some particular purpose.

Education loans

Source: economictimes.com

This money is used for better education and improving your skills. Many students are not able to pay their college or courses, but a lot of governments and loan agencies offer to study plans for young people. Sadly, there are a lot of examples when these people give up on their dreams because they’re not able to pay for their studies. Taking a loan is an understandable step because it is an investment in a better future. Educated people are more likely to have better jobs, and that also means better salaries. When they start earning enough, they will pay their debts. But, when there is no career path they need to follow, in some cases, it may end up in bad debt, but that’s the most negative case to consider.

Starting a business

When the client has a good business plan and analysis, the banks and agencies are more likely to help them establishing that company. If they use the money properly, they will earn more, creating a positive profit, and getting back the money they owe in just a few years. This step also brings some risks, but if the client is smart enough to make a strategy and don’t spend the money on unnecessary things, the bad outcomes are less likely to happen.

Investing in a new home

Every young person dreams of their own home, but there are a lot of them who still live with their parents or rent houses and apartments so they can be independent and raise a family. Buying a new home is a huge investment, so if you plan to take credit for this purpose, you should be aware of the rates, fees, and every potential risk. But, in general, this is good debt, because you know that in 15-30 years the home will be completely yours.

Bad debts

Sometimes, when we have enough money to maintain some lifestyle that requires a lot of spending, we think the situation will be the same for the lifetime. But, as we know, life is a cycle of winning and losing and if we don’t plan our expenses smartly, we can end up being poor and in debt for a lifetime. It’s very sad to see someone who was living a luxurious life struggling with everyday life. We all can avoid situations like that if we learn how to manage our money and spend them for proper purposes.

These are a few examples of money loans that will lead us to bad debts:

Vacations and traveling

Source: travelchannel.com

We all want to travel, but before we do that, we must be aware of our possibilities and financial power. Maybe your greatest fantasy is to rent a yacht and sail around the world, visiting all those places you see in the travel agencies catalogs, but you must think about it carefully if it’s really necessary at the moment. If you can’t afford to travel around the world this year, it’s always a better idea to postpone that plan for the future and visit places that won’t require taking credits and paying them back for years. A few weeks of luxury won’t make your life better if you need to pay for that in the next decade.

Clothes and cosmetics

Source: linguahouse.com

Wearing expensive clothes maybe will boost your self-confidence, but that will last only a few months. Then, you’ll realize that it wasn’t worth it because you will have to work a lot to get the money back and pay the loaner. It’s just not worth it, so save your money for something better.

Going out or celebrate something

Source: engoo.com

Almost every one of us witnessed some cases when the people were borrowing huge amounts of money so they can have their dream wedding or birthday celebration, or just going out a few evenings and visit some restaurants or expensive clubs. We don’t need to say that it’s not a smart choice, especially if that means you need to pay for that few moments very long after they ended.

People must understand how loans and debts work, so they won’t end up working their whole life just to pay them back to the loaner. We hope this article helped you think twice before you decide to ask for a loan.