Good debt vs. Bad debt

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Here’s a question for you, is there such a thing as good debt? Borrowing to acquire something that will appreciate in value and/or build wealth over time can be classified as good debt. I classify bad debt as something that doesn’t add value and can result in financial loss. Here are some examples of good and bad debt for you to take on board and become smarter with your money.

Good debt

  • Mortgage: Real estate which appreciates over a period of time is a good investment. Mortgages generally have lower interest rates than most loans. When you buy a property, the market does go through peaks and troughs, but ultimately over a long period of time a property will gain in value and be one of your strongest assets.

  • Business loan: If you know with some certainty that your business will do well financially, then I would argue that a business loan is also a good debt. Kick starting your business can reap you great rewards.

  • University loan: It was the American writer and inventor, Benjamin Franklin who claimed that ‘An investment in knowledge pays the best interest’. These days you have to fund your studies with a student loan, but it should pay dividends when you come to look for a job. Student loans offer some of the best interest rates and hopefully that qualification will help you to secure a better position.

Bad debt

  • Credit cards: Credit cards have premium interest rates, if you want to purchase something wait until you have the funds available to buy that item. If you put things on credit and can’t afford to pay it back, your costs will snowball. It’s also an invisible way of spending as you are piling credit on a card. It’s very easy to spend more than you can afford.

  • Car loans: Vehicles lose their value pretty quickly and the depreciation starts as soon as you drive it way from the showroom. It’s never a good idea to buy a car on impulse as vehicle finance usually attracts a hefty interest.

  • Holiday loan: Travel loans are becoming more popular, but for a week of two or enjoyment you could end up saddled with debt. A holiday is a luxury, if you want a vacation plan for it in advance by saving up for it.

Staying away from bad debt comes down to making wise choices. If you need guidance speak to me at TV Financial Services and I’ll offer advice on how to make your money work for you.