Good debt. It’s a term that gets thrown around a lot in the world of finance, but what does it mean? Debt is usually considered bad because you have to pay interest on it and if not paid back in time, can lead to other consequences such as bankruptcy. But there are some types of debt that are thought to be good for your financial future – or at least better than others.
What Exactly Is A Good Debt?
In this post we’ll take a look at what constitutes “good” debt and how you can responsibly manage your finances so you’re never saddled with the wrong kind again!
Define Good Debt:
Good debt in simple terms is any loan that has a higher chance of making you money, or at the very least allowing you to keep what you already have.
There are three major types of loans that are considered good.
Real Estate Loans
Small business loans
Real Estate Loans:
Real estate loans are considered good debt because they can provide you with a source of passive income, such as rent. The value of the property is likely to grow over time and unlike most other types of debt, real estate usually isn’t subject to interest rates. If anything goes wrong and your lender takes possession of the home, it’s unlikely that he or she will sell at a loss since there aren’t many comparable properties on the market that would command lower prices.
Small Business Loans:
When starting up your own business there may be some costs involved in getting things off the ground – whether those expenses come from travel for research purposes or buying supplies so you can keep operating once you’ve gotten going. While these might not seem like the most obvious examples of good debt, they might be some of the best.
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Student loans are another form of what’s considered to be good debt because while you may not see an immediate return on your investment, a college degree can lead you to more career opportunities and higher wages down the line – which is especially important in today’s economy where many jobs have disappeared or pay has stagnated. It also helps that student loan interest rates are usually lower than other types of credit too!
What Is a Bad Debt?
Bad debt is any loan taken out with the intention of using it for consumption, or something you don’t really need but want. For example: buying a brand new car on credit so you didn’t have to pay full price at the dealership would be considered bad debt because there’s no guarantee your vehicle will appreciate over time and most likely it’ll just depreciate once driven off the lot . You also won’t see an immediate return by taking out this type of loan since cars are usually bought outright – not financed like real estate or small business loans mentioned above. Another sign of bad debt includes paying high interest rates which drain away money instead. Debt that isn’t paid back in time can lead to severe consequences such as bankruptcy.
Does Good Debt Actually Exist
We have already defined what good debt is but are loans like real estate loans, student loans and small business loans actually good. Well, it all depends on the outcome. You take a credit card loan to buy something that isn’t going to yield any profit for you then it is a bad debt but if you get a loan for your business then it is considered a good debt but what if your business fails and you are not able to pay back the loan? Would it still be considered a good debt? The point to understand is that there is risk in both the debts but good debts (if managed properly) can yield a lot of financial benefits for you.
How Can You Manage Your Good Debt?
It takes time for any type of financial gain so it makes sense why people would want to take out loans that will give them something back right away. However there are certain downsides to this type of thinking that you need to know about if you want your good debt to work out in the long run.
First is interest rates. Interest charges are essentially how lenders make money so they’re going to charge more than usual for loans considered “good.” Secondly, because you can’t afford these expenses without taking on additional risk with a loan, it means there is a chance things won’t turn out as well as you hope and there could be consequences such as bankruptcy. That’s why people tend not to rely too heavily on one or two kinds of credit – instead having multiple types from different sources helps spread their risks even further while giving them access to various levels of finance depending on what they need at any given time.
Josh is an entrepreneur and financial expert with over a decade on Wall Street as an economic strategist. His career started in finance, progressed to owning multiple business, and now shares his insights and life hacks with readers of DailyWisely.com.
Josh's work and authoritative advice have appeared in major publications like Nasdaq, Forbes, The Sun, Yahoo! Finance, CBS News, Fortune, The Street, MSN Money, and Go Banking Rates. Josh currently shares his financial expertise in investing, wealth management, capital markets, taxes, real estate, and personal finance on his personal finance site, Top Dollar Investor.
Josh graduated from Cornell University with a degree from the Dyson School of Applied Economics & Management at the SC Johnson College of Business.
Josh is the owner of Top Dollar and Daily Wisely, the former focusing on personal finance and wealth building strategies, while this site focuses on living well and enriching content that Josh curates with his team.