Not all debt is necessarily bad or disadvantageous to your goals. Taking on the right type of debt can help you achieve short and long-term financial goals. The key is understanding the difference between “good” debt and “bad” debt and using that knowledge to decide when and how to borrow money.
Below, Resolvly LLC explores what you need to know about good debt vs. bad debt.
Good Debt vs. Bad Debt: The Basics
At its most basic, the difference between good and bad debt comes down to whether the money you borrow is used to purchase an asset that will appreciate or depreciate. Appreciating assets are likely to be worth more in the future than they are today.
A home is a good example of an appreciating asset. Over time, homes typically increase in value, which means that the debt associated with a home purchase (a mortgage) can be considered good debt.
On the other hand, depreciating assets are likely to be worth less in the future than they are today.
A car is a good example of a depreciating asset. When you purchase a car, it immediately loses value, which means that the debt associated with a car purchase (a car loan) is typically considered bad debt.
Of course, the distinction between good and bad debt is not always clear-cut. In some cases, the asset you purchase with borrowed money may appreciate for a time and then begin to depreciate. For example, many people choose to finance their education with student loans.
In the short term, the investment in education may pay off in a higher salary. However, over the long-term, the value of that investment may decline as your earnings potential reaches its peak and begins to decline.
Good debt is generally associated with purchases that will appreciate or generate income. Conversely, bad debt is associated with assets that depreciate in value or cost money to maintain. Here are a few more examples of good debt and bad debt.
Good debt includes:
- Mortgages
- Home equity loans
- Investment property loans
- Student loans
- Business loans
Bad debt includes:
- Credit card debt
- Auto loans
- Payday loans
- Personal loans with high-interest rates
Regardless of whether the debt is good or bad, you are still responsible for repaying the money you borrowed plus interest. With that in mind, it’s important only to take on as much debt as you can afford to repay.
Talk to a Consumer Protection Attorney Today
If you’re struggling with debt and are looking for a legal solution, the Florida Bar-approved lawyer referral service, Resolvly, will work with you to find the right attorney to help you resolve your debt and get back on track financially.
Founded in 2015, Resolvly has a proven record of success in helping thousands of Americans find the right legal-based solution to reduce or dismiss their unsecured debt, and is committed to helping clients get the best possible outcome. Contact Resolvly LLC today for assistance with credit card debt, private student loans, business debt, medical bills, and vehicle repossession.