Common notion that everyone has is the debt is always bad. Some may counter attack by saying it is good. How do you differentiate? So the basic reason due to which a debt can be good or bad is the situation and condition on how this debt is going to affect your future finances. If your future finances are going to improve due to the debt than it is good whereas if the debt is taken for luxury items and makes your future finance depreciate than it is bad.
Let’s know the difference between the two in little more detail
Why Debt is good?
If the Debt has been taken to make investments for your future endeavours and financial planning than it is good debt. Debt is good if it returns you good money in the future. Let’s see what kind of debts can be good:
- Loans taken for property or home
Property and home are the best investments as the value of them supposed to inflate with time. So the loan taken to build a property is an investment which will turn into an asset.
- Debt taken by students for studying
Student loan is considered good debt as in the longer run your education that you completed with the help of loan amount will land you a good job.
- Loan taken for Business
Taking debt for expanding the business or starting a new one is mostly considered as good debt as it will help you make profit more and more.
Why Debt is bad?
Debt is bad when it is taken for commodities whose value will depreciate in future mostly consumer goods and day to day expenditure which has no return.
It is human psychology, we end up spending more consumer goods, and all of us are looking for things like latest smartphone, clothes and drinks. All these things give us the satisfaction of living a well-off life and we thus tend to spend more on them.
To sum it up, if you are buying these things on credit then you are paying interest over interest for the same thus spending all the savings you could have done on the interest of the debt.