When a borrower takes a loan to purchase a car, a house, to pay credit card bill or to pursue higher education, it is given in the form of Debt from the bank or the financial institution. So, once it is approved, it becomes the responsibility of the loan borrower to pay it on time. However, the purpose for which the loan has been taken decided whether it is a good or bad debt. Scroll down and get to know the difference between the two:
What is Good Debt?
A good Debt is a loan that generates future investment like higher education, buying a house, home repairing, starting a small business, etc. These loans have lower interest rates as well as they generate future income too.
Example of Good Debt
Student Loan: A loan which is taken for higher education is considered as good debt. Why? Because this loan is taken for a better future and the interest rates are also very low. Also, when you take higher education, it is treated as a future investment only, wherein you sow less and reap more.
Home Loan: Everyone wants to have their dream house but not everyone can afford the price of an apartment in one go. So, here comes the role of Home loan, another good debt which is used to fulfill the dream to own a home. A loan which is taken for home renovation is also considered as good debt because when you take such loans they generate ROIs which is much better than what loan you take. In the commercial market, it comes in the form of Capital gains for investors.
Business Loan: If you want to start a business on a smaller level and need cash for the same, then banks provide Business loan as debt for the same. With hard work, you can easily double what you have borrowed from the banks and pay them easily to achieve profits too. But keep in mind, if it fails, it might convert into bad debt. So, take cautious steps.
What is Bad Debt?
While a good debt if used cautiously convert initial earnings to great investments, a bad debt doesn’t have the potential to generate future investments. These loans have higher interest rates and also have strict rules and regulations if EMIs not paid properly.
Example of Bad Debt
Credit Card: It is always said that if you can’t afford it don’t buy it. Same is the case with a credit card too. You purchase products from credit card and not able to pay the EMIs, then the debt converts into bad. You have to pay high interest rates that finally lead to a financial crunch.
Personal Loan: A personal loan when taken to pay other loan amount is also considered as a bad debt. Personal loans are available at very high-interest rates. And, if you fail to repay the EMIs of personal loan you will in a big crisis.
Vehicle Loan: Not all vehicle loans are considered as bad debt, but if you take them to show the lavishness then it is a bad loan. Keep in mind that whatever money you borrow, you only have to repay it. So, why to make your life hectic by taking unnecessary loans or which is unworthy.
So, it’s better to increase your net worth by taking good debt and not depreciate it by taking bad debt.