Good Debt vs. Bad Debt

Do not accustom yourself to consider debt only as an inconvenience, you will find it a calamity – Samuel Johnson

In this consumer society with spend-first and pay-later option, it is very easy to slip into debt. Today, there are many people more likely to get into debt. But debt is almost always a bad thing. In the past, people used to find debt as an assistance to accomplish the need or to survive at hard times.

But these days, people are becoming careless and inviting debt at all times in their life. The lack of knowledge about how money works and lack of importance of personal finance makes people to get into debt. So, we believe that debt is good only at times in compulsion or financial difficulties, and it is always a bad thing to use debt to finance things that can be consumed easily. In this article, we will read about why debt is bad and when, if at all to get into debt.

Bad debt
We all know that debt is always a bad idea. A famous American philosopher, Ralph Waldo Emerson says, “A man in debt is so far a slave”. But surprisingly there are large number of people fail to realize this until they are into debt-trap. When you use debt to purchase something that has no potential to increase its value and instead goes down in value immediately, then it is a bad debt. The purchase of disposable or durable item, which continue to lose value with time while the amount you need to repay (along with the interest amount) increases, is the worst debt to get into and doesn’t make any sense.

Examples of bad debt
Credit cards or personal loans to finance a vacation, consumer durables are some of the examples of bad debt. People take huge debt for their careless and frivolous spending. For them, debt will be sucked throughout life if they were unable to repay.

Good debt
Good debt is something which if you use the debt money that has an income earning ability or appreciating asset that provides positive cash flow. When you use debt money except in business, where it allows you to get more income if you can purchase business equipment or inventory, then it is possible to be good debt.

Examples of good debt
Mortgage loans, educational loans, debt taken for seasonal business are considered as good debt. A home is considered good debt because it is very difficult for most people to save enough money to buy it cash down. For the large costs of owning home it is considered acceptable to take a home loan. However, it is a good idea to pay the home loan as soon as possible. A home also gives stability and a permanent base for a person.

And, in case of education loans, it can be a good idea if the education being pursued is good. A sensible person studying on loans has to work hard, possibly earn some money while doing his summer project and live within means till he repays the loan amount.

For sales executives, they need a two-wheeler to get a job in sales. In such situations taking a loan for a two-wheeler is not a bad idea. Since the loan will help them find an income generating job and means to pay for the loan.

Should you go for debt?
The answer for this question depends on your circumstances. Taking debt is not a sensible way to purchase items that you cannot afford or you don’t need. Opt in case of emergency, education fee, house purchase, but make sure you repay your debt on time. After taking a loan, you should make a commitment to live within the reduced income. This involves many sacrifices for the period of the loan payment.

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