Can Debt be good or bad, what is the difference?

Loans

What is Good Consumer Debt?

If something has disadvantages it has benefits as well. Same goes for consumer debt it can be good as well. The determining factor is the need. Consumer good whatever it may be, like if you are buying tools and equipment for your business, so as it is going to help in increasing your profit it is good debt.

Similarly though buying a car is considered a bad debt as the value will depreciate but if you truly need the car it can be considered as good debt, but if you end up getting more gears for accessorising your car to make it look flashy, that will increase your loan and hence you will pay more interest so a bad debt.

How can a good debt convert into bad debt?

The good debts that we discussed can go wrong way as well. Let’s see how:

  • House loan going bad:

In some places like Australia it is very common to increase the period of the loan to include their credit card bills or to buy car. Generally consolidating the debt is good as reduces the cost but it is only in the scenario when you pay off the debt in next 4-5 years. Extending the period will only make you liable and you would end up paying the debts till you retire.

  • Student loan going bad:

It is only advisable to take student loan when you think the particular qualification is going to enhance your earning power, if not so then it is like draining the money into the gutter.

Paying the Loan timely will help you

If you have paid your previous loans on time it becomes easier for you to get further loans as you build a good credit track record. It is always good to pay the amount as early as possible. Paid loan is always good loan. So plan and start paying off your debts.