Good Debt vs Bad Debt

Education

• Taking out a student loan to pursue higher education can be considered good debt.
• Research shows that individual earns 66% more than those with just a high school diploma over their lifetime.

Home Mortgage

• Buying a house with a mortgage is often seen as good debt. Over time, real estate tends to appreciate in value, meaning your investment can grow and you can even sell it at a profit.

Business Loan

• Starting a business requires capital, and taking a loan to finance it can be seen as good debt.

On the other hand, bad debt refers to borrowing money for things that lose value overtime. These debts often come with high-interest rates and can trap you in a cycle of financial stress.

It means paying for unimportant things which makes your goals harder to achieve.

Let's see some examples👇

Credit Card Debt

• Accumulating credit card debt by purchasing non-essential items or living beyond your means is considered bad debt.
• Some credit card companies charge as high as 40% p.a.

Luxury Car Loans

• Taking out a loan for an expensive luxury vehicle can be classified as bad debt. Cars typically depreciate in value over time, meaning you may owe more than the car is worth.
• A new car can depreciated by 8% to 10% as soon as bought.

Payday Loans

• These short-term loans often target individuals in need of quick cash. They come with exorbitant interest rates and fees and may exceed 400% APR.

Understanding the difference between good and bad debt is essential. However, it's equally important to have a strategy in place to effectively manage our debts and foster our financial growth for the future.

We always need to make a plan to repay what we owe, finding ways to lower interest rates, and focusing on important payments.