What’s the Difference between Good and Bad Debt?

Good Debt vs. Bad Debt

Difference between Good and Bad Debt?

When we come across the term “debt”, we often associate with some kind of negativity. When one is in debt, there are added expenses involved each month due to being liable to repay money to the lender that he/ she borrowed a loan from in the first place. However, is all debt really bad? Does being indebted to a person mean that one is in a bad financial situation in life? Let’s find out.

There are two kinds of debts- bad debt and good debt.

Bad Debt:

This isn’t too surprising considering the fact that majority of us relate debt to being bad. But if that is so, why the term “bad” in the first place? What are we trying to differentiate it from? Before answering these couple of questions, let’s understand what bad debt exactly is.

Bad debt would be taking a loan for a purpose that doesn’t repay you.

Examples of bad debt would include taking a loan to pay off bills- this can be considered to be bad debt because you’re taking a loan for basic necessities and are ending up paying more without getting any returns whatsoever.

Investing in a luxury car brand- not only is such an investment very expensive, but neither do you earn out of it even if you decide to re-sell it a few years later, and again you have to repay a larger sum of money than what you had borrowed initially.

Bad debt would also typically include multiple debts since now not only do you have to repay multiple lenders, but at very high interest rates.
Now that we’ve established what bad debt is, let’s move on to the second part of this article

Good Debt:

Good debt; a surprising terminology to refer to a situation of debt, isn’t it? Good debt can be considered to be debt that is extremely helpful to a person during their lifetime. Unlike what most of you may associate it to, good debt do not refer to loans that come cheap. They refer to loans that in turn give you returns.

For example, if a person invests in a house, it can be considered to be good debt. Why? Because investing in real estate is almost always a good choice, and can give you returns in the future. Even if you may have to repay a certain amount that’s slightly higher than what you’ve borrowed, you can end up earning way more by selling that house say 10 or 20 years down the line. It thus becomes a profit, which is why it is termed as good debt.

Another example can be considered to be taking a student loan. A student loan may not necessarily be an investment which you can get a profit out of immediately, but it does affect your livelihood. If you take a student loan, study well and get a good job, not only will you be able to repay your loan without any difficulty but you shall also be capable of earning well throughout your life.

Another example can be the money that you borrow despite having enough cash, but don’t want to use it due to the returns on your savings account being higher than that of the interest on your loan.

Good debt and bad debt can be compared to good investments and bad investments. If the return on your investment isn’t a profit, it can be considered to be a bad one. However, the fine line between bad investment and debt is that when you “invest” in something, you also see luxury and comfort which can qualify as good even if it may not provide you with returns as such.

On the other hand, sometimes a necessity can be considered to be bad debt, but a good investment since it may not provide returns but shall offer comfort. For example, if you invest in healthy food, it may not give you any kind of “returns” as such, but it is necessary to keep your body fit and healthy.

Is It Possible to Turn Bad Debt into Good Debt?

It isn’t all that easy to turn bad debt into good debt. For one, if you’ve invested in a product that is considered as bad debt, your only way out is to repay your lender with interest. It cannot be converted into good debt. However, there can be times when you manage to make a profit out of bad debt- say for example if you buy a model which is one of the last of a luxury car brand, run it a few times and sell it to a car enthusiast who’s a fanatic of that particular model and brand who desperately wants it, you may make a profit- but these cases are very rare. That however can be considered to be good debt, but that’s just your luck.

A sure shot investment which is good will be an investment that gives you returns.

How Do I Get Out of My Bad Debt Situation?

If you’re in a bad debt situation, you in most likelihood are stuck in a debt trap. In order to get out of it, you can consider borrowing a loan with a lower interest rate, to pay off those with higher rates of interest.

You can choose to take an installment loan from InstallmentLoanz, since these loans are not only affordable, but are also easy and flexible to repay.

With the help of an installment loan online from us, you can pay off all or most of your existing debts and be liable to a single lender. You can repay us over the course of a few months which shall be easier on your wallet as compared to having to repay your loan all at once, in lump-sum. Instead of taking a payday loan which will have to be repaid as a whole in turn pushing you deeper into your debt trap, choose an installment loan for debt consolidation and you shall be able to get out of your bad debt in no time.

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