When you hear the word debt, there is usually only a negative connotation associated with it. However, debt doesn’t always have to be a bad thing.
There are some circumstances in which owing money can be good for you.
What is good debt?
Good debt can be classified as borrowing money which will help put you in a better financial position in the future. Some examples could include:
Buying a House
Whether you are looking to purchase for yourself or to invest, taking out a home loan can be beneficial. Mortgages usually have a lower interest rate than the rate for a share margin loan, and although property is a long term commitment, it would hopefully increase in value over time and you will make a profit if you decide to sell. It is important to remember that the more money you contribute in the beginning, the less you will have to owe. A large deposit will also help you avoid other fees such as Lenders Mortgage Insurance (LMI).
University, TAFE and other educational courses provide you with the skills and experience to move forward in your career. It can also give you the tools to set up a business for yourself, generating a strong income for yourself.
What is bad debt?
Bad debt is when you borrow to purchase things that may be unnecessary and don’t have the potential to improve your financial situation in the future. In some cases, bad debt is unavoidable; however, there are ways to keep bad debt to a minimum.
Even though a car is a necessity for most people, it is usually going to decrease in value fairly quickly. Paying off your car loan quickly will ensure that you don’t owe more than it is worth and free up your cash to save for assets that are going to increase in value.
Credit cards would have to be one of the worst forms of bad debt as the interest rates are usually very high if you are unable to pay them off in full each month. Many people use credit cards to pay for everyday items which are possibly even on sale. You could end up paying heaps more in extra interest for the sake of snapping up a bargain.