“Buying on the installment plan makes the months shorter and the years longer.” Most of us would agree with this. After all, debt is a trap, isn’t it?
However, not all of it.
Since childhood, we have been taught that debt is bad and that one should make sure that they deal with it carefully without falling into situations that can put them and their family in extreme distress. While most of these advices about debt make sense, you need to keep in mind that not all of your debt is bad. There’s something called good debt too.
What is good debt?
In simple words, good debt is what increases your net worth or has future value. Good debt is debt that is used to acquire income-generating assets like a business loan, home loan, education loan, etc.
Good debt lets you manage your finances effectively, helping you leverage your wealth. It helps you acquire assets that can be used during unforeseen emergencies. In a way, it also provides security during unexpected events.
Business loans: A business loan taken by you or your family is essentially good debt as it is used to start a business venture that can prove an investment in future and potentially become an asset that can grow in value if managed well.
Home loan: A home loan, again, is considered good debt as it is used to buy a house that would appreciate in value and help build wealth over a period of time. While you repay home loan for a long period, the value of your house also simultaneously appreciates over the course of time. Besides, you can also earn rent on it, meaning, it can more than pay for itself and get you profit. Moreover, it comes with tax benefits, therefore, justifying why real estate is the go-to investment option for many.
Education loan: This kind of loan is used to finance education which can bring a lot of career opportunities that could mean good income. Some student loans also have lower interest rates than others and have tax benefits. However, a student loan should be handled carefully as it can become bad debt if not paid back responsibly and on time.
What is bad debt?
Bad debt is exactly the opposite. Bad debt is what gives you a tough time. It refers to debt incurred to finance liabilities that are not likely to generate any income or have any future value. These expenses are heavy on your pocket and don’t give you any returns. Credit card outstanding, car loans, personal loans for discretionary spending, luxury items or depreciating assets are all considered as bad debt.
When not handled carefully, bad debt can put you in unpleasant situations as it only increases liabilities for you if not repaid on time.
Credit card: Most of us have this debt. This is essentially because interest rates on credit cards are extremely high and if thing go out of hand, it can take a while before you sort them out. This is why it is advisable to use credit card responsibly by making payments on time and not falling for “minimum payment” option.
Car loans: Auto loans are largely bad debt considering vehicles are depreciating assets. Some car loans also carry high interest rates. However, depending on circumstances, it can sometimes be considered good debt if one is using the car to get to work, in which case, it is used to generate income.
Personal loans: Personal loans used to pay another debt or to buy depreciating luxury items or for discretionary spending are considered bad debt as they only increase liability without adding to income or generating returns and can set you off track.
Some of money lending mobile applications offer personal loans up to ₹5 lakh
First Published: 20 Jun 2023, 09:19 AM IST