Is there really good debt and bad debt? You will be surprised to know, yes. Therefore, we want you to know the differences between them.
In addition, on the other hand we have very bad debts and that we should avoid as much as possible. We refer to those with a very high APR. They are dangerous because in many cases people feel that they never finish paying a debt, since they borrow again and again to deal with it.
Differences between good and bad debt
As you know, not all debts are equal. They are seen as something negative and it is normal to run away from them. Of course, while some impoverish us, others could help us earn money. That is why you should know well how they differ:
What are bad debts?
Bad debts are what we get when we buy something that we cannot pay in cash. Some of the main examples of bad debts are the order of the day and are the mortgage of a house, the purchase of a car, etc. But it can also happen with purchases paid by credit card.
They are bad debts because they keep us tied to be returning an amount of money in the future along with some interest. So they do not report benefits apart from the consumption of the good. They serve to buy liabilities and do not offer economic profitability, moreover, they make us lose financial freedom by feeling indebted for a certain time.
What are good debts?
It is hard to believe, that way out, that there are good debts. But yes. You may not refer to them as ‘debts’ but the truth is that they are. They consist of borrowing money to make investments or acquire goods in order to obtain a return, a flow of money into your pocket.
That is to say, in these good debts assets are bought with the objective that they report us a profitability. Because although they are also associated with the payment of interest and commissions, we win with the obtained profitability.
An example is the purchase of a home that will later be used for rent. If you pay 500 dollars per month of mortgage and rent at 800 dollars per month, you get 300 dollars of benefit every month. So we will be subject to a debt, but a good debt, because thanks to it we earn money.
We find other examples, such as the purchase of goods whose value is expected to increase over the years. They can be antiques, vintage cars, maybe a financing in a company, etc. There are many options regarding “good debts” that allow us to ask for money and get more in return.
What are the differences between good and bad debts?
To finish understanding the differences well, let’s give some examples. When we talk about bad debts we highlight the purchase of a car or a mortgage, but also other bad debts associated with credit cards and which are more common than they seem.
Among the debts associated with credit cards we highlight the payment of vacations, the purchase of a television (it may have no interest but perhaps an opening commission), or any consumer loan that is amortized over a longer period of life of the financed product.
On the other hand, as we advance, good debts are those that allow us to earn extra money thanks to having requested them. The best example to understand it is the purchase of a house to be rented, as an investment.