Is There Really Such a Thing as Good Debt vs Bad Debt? | The Treasury of the People
Updated: Jul 14, 2022
The personal finance community is divided on the issue of debt. Some believe that all debt is bad and should be avoided, while others believe that some types of debt can actually be beneficial in the long run. So, what’s the truth? Is there really such a thing as good debt vs. bad debt?
What Is Debt?
Debt is defined as “an obligation to pay money to another person or organization.” It is typically in the form of a loan. The debtor is usually required to make regular payments to the creditor. The debt may be secured by collateral, such as a car or house; or it may be unsecured, which means that the creditor can’t take any of your assets if you default on the loan.
The Different Types of Debt
There are four main types of debt: secured, unsecured, revolving, and non-revolving.
Secured debt is debt that is backed by collateral. If you default on the loan, the lender can seize the collateral (usually your home or car) to recoup their losses. The most common type of secured debt is a mortgage.
Unsecured debt is not backed by any collateral. If you default on the loan, the lender cannot seize any of your assets. The most common type of unsecured debt is a credit card.
Revolving debt is a type of credit that allows you to borrow money up to a specific limit and then pay it back over time. The most common type of revolving debt is a credit card.
Non-revolving debt is a type of credit that you borrow in one lump sum and then pay back over time. The most common type of non-revolving debt is a student loan.
Good Debt vs. Bad Debt
There are two main ideas of debt: good and bad. Good debt is defined as debt used to finance something that will increase in value over time, such as a home or an education. On the other hand, bad debt is defined as debt used to finance something that will decrease in value over time, such as a car or a boat.
Some people believe that all debt is bad and should be avoided. Others believe that some types of debt, such as student loans or mortgages, can be beneficial in the long run. So, what’s the truth? Is there really such a thing as good debt vs. bad debt?
The answer may surprise you. While all debt should be repaid eventually, not all debt is created equal. In fact, there are many benefits to taking on good debt, such as increasing your net worth and building your credit score.
Of course, there are also downsides to taking on debt, such as the risk of default and the interest payments you’ll have to make. However, if you’re smart about managing your debt, these downsides can be minimized.
The Pros of Good Debt
Good debt can be defined as debt used to purchase something that will appreciate in value or generate income. For example, student loans can be considered good debt because they are an investment in your future. Another example would be a home loan or mortgage, as home values generally increase over time.
The Cons of Good Debt
There are a few potential downsides to taking on good debt. First, it can be challenging to qualify for loans that are considered beneficial, such as a home loan or student loans.
Second, even if you qualify for these loans, you still have to pay it back with interest. This can cost you more money in the long run, even if the interest rate is low.
Finally, loans, even beneficial ones, can strain your finances if you’re not careful. If you take on too much debt, it can become challenging to make your monthly payments and keep up with your other financial obligations. This can lead to financial problems down the road.
So, while good debt can be beneficial in some ways, it’s essential to be aware of the potential drawbacks before taking on any new debt.
The Pros of Bad Debt
Bad debt, such as credit card debt or personal loans, can ultimately be beneficial. For one, it can help you build your credit score. A high credit score can give you access to better interest rates on future loans, saving you a lot of unnecessary extra cost in the long run.
Additionally, bad debt can help you in an emergency. If you have a good credit score, you’ll be able to qualify for a personal loan with a lower interest rate. This can be helpful if you need money for an unexpected expense and don’t have the savings to cover it.
Of course, bad debt should be avoided if possible. But if you find yourself in a situation where you need to borrow money, it’s essential to know that there are some benefits.
The Cons of Bad Debt
Bad debt is typically defined as any debt that isn’t used to purchase something that will appreciate in value or generate income. In other words, bad debt is anything that doesn’t help you make money or grow your wealth. Some examples of bad debt include:
Credit Card Debt
Credit card debt is one of the most common types of bad debt. Credit cards charge high-interest rates, making it challenging to pay off the balance. If you find yourself in credit card debt, there are a few things you can do to get out. First, stop using your credit cards. This may seem obvious, but it’s essential to cut up your cards or put them away, so you’re not tempted to use them. Second, start paying more than the minimum payment each month. The sooner you can pay off your balance, the less interest you’ll have to pay. Finally, consider transferring your balance to a card with a lower interest rate. This can help you save money on interest and pay off your debt.
Like credit card debt, personal loans can often carry high-interest rates. If you don’t repay the loan in full and on time, you could pay significantly more than you borrowed. Personal loans are typically unsecured, so they’re not backed by collateral like a home or car. This makes them riskier for lenders, and as a result, they may be harder to qualify for. Finally, personal loans can have origination fees, which are charges levied by the lender for processing the loan. These fees can add up, so be sure to factor them into your overall costs. Personal loans can be a helpful way to finance big purchases or consolidate debt. Still, it’s essential to understand the risks before signing on the dotted line.
How To Manage Your Debt
Assuming you’re in debt, there are a few things you can do to manage it better.
First, figure out how much debt you have. This includes all debts, such as credit cards, student loans, car loans, and any other type of loan. Once you know the total amount you owe, you can create a budget to help you make payments on time.
Next, focus on paying off your high-interest debt first. You can make extra payments on your debts each month or consolidate your debts into one lower-interest loan. This will save you money in the long run because you’ll be paying less interest overall.
Finally, make sure you keep up with your payments. Missing a payment can damage your credit score and make it harder to get out of debt. If you’re having trouble making payments, contact your creditors to see if they can work with you on a payment plan.
Should You Consolidate Your Debt?
The most significant benefit of consolidating your debt is the lower interest rate. You essentially take out a new loan with a lower interest rate when you consolidate your debt. This means that you will save money on interest charges over the life of the loan.
Another benefit of consolidating your debt is the simplification of your monthly payments. When you have multiple debts, you have to keep track of multiple due dates and payment amounts. This can be difficult to manage and lead to missed or late payments. Consolidating your debt into one loan with one monthly payment can make it easier to stay on top of your finances.
There are some potential drawbacks to consolidating your debt, as well. One is that it could extend the time it takes to pay off your debt. You are essentially starting the clock over on your loan terms. Another potential drawback is that you could end up with a higher interest rate if you consolidate your debt into a new loan with a longer-term.
When consolidating your debt, it’s essential to compare the interest rates and terms of different loans to ensure you’re getting the best deal. You should also consider whether consolidating your debt will help you meet your financial goals.
Consolidating your debt can be an excellent way to save money on interest charges and simplify your monthly payments. However, it’s essential to compare the terms of different loans before you decide to consolidate your debt.
How To Get Out of Bad Debt
There are many ways to get out of bad debt, but the most important thing is to find a method that works for you. Here are a few popular options:
This method involves paying off your debts from smallest to largest. You’ll see quick progress by doing this, motivating you to keep going.
This method involves taking out a new loan to pay off your existing debts. This can be a good option if you get a lower interest rate on the new loan.
This method involves negotiating with your creditors to settle your debt for less than you owe. This can be a good option if you cannot make your minimum payments.
This is the last resort option and should only be considered if you have no other options. Bankruptcy can significantly negatively impact your credit score, so it’s essential to understand all the pros and cons before deciding.
No matter which method you choose, the most important thing is to take action and get started on the path to becoming debt-free.
Debt is something that everyone will have to deal with at some point. It’s essential to understand the different types of debt and how they can impact your financial situation. Good debt can be used to finance things like a home or an education, and it can provide long-term benefits. However, bad debt can quickly become unmanageable and lead to financial problems. If you’re struggling with debt, several options are available to help you get back on track. Consolidating your debt into one loan can save you money on interest charges and simplify your monthly payments. You can also negotiate with your creditors to settle your debt for less than you owe. If you’re unable to make your minimum payments, bankruptcy may be an option. However, this should only be considered as a last resort. No matter which method you choose, the most important thing is to take action and get started on the path to becoming debt-free.
If you have any questions about good debt vs. bad debt, please feel free to ask in the comments section below.