Let's be honest, we all associate 'debt' with negative connotations. If you ever hear someone talk about this topic, it's rarely in a positive light. Debt is bad - this is a statement most of us will agree with without a second thought.
However, what if it's not true? Navigate the various online financial resources, and you'll find whispering of good debt. What is this mythical creature? Is there truly such a thing as good debt? The brief answer is yes, good debt certainly exists. While owing money is never ideal, there are instances where it can be seen as a good thing.
This throws up a new question; how do you know if a debt is good or bad? Here are a few points that help you work out the difference:
Are you in debt to the government?
Some debts are government debts, meaning you owe money to the people running our country. As noted by DTSS U.S. Complete Freedom, the government can impose charges and sanctions that put you in debt. Tax is a great example; many people are in tax debts due to excessively high charges and penalty fees from the government. Generally speaking, government debt is bad debt because you gain nothing from it. You pay a lot of money, but you see no direct impact on your life.
Are you subjected to massive interest rates and fees?
Debt tends to be bad when you're charged huge interest rates and lots of additional fees. This is a problem because it basically means you're paying more than you owe. You've borrowed money, and it may have helped you out, but you're paying it back and then some. It leads you to a slippery financial situation as you might not have enough money to cover all of these extra charges. Things are made worse when these fees and charges are hidden and come as a surprise. Good debt will usually be easy for you to manage as you're on a payment schedule with honest interest rates that you can plan for.
What do you get as a result of the debt?
Lastly, think about what you gain from the debt. I mentioned this when talking about government debts - what will you get out of the situation? In some cases, the benefits of borrowing money far outweigh the downsides of being in debt. The best example of this is borrowing money to buy a house. You will be in debt for years, but you gain something hugely valuable. You have a house that you can live in, meaning you no longer have to pay rent. This house is your property, so you can fix it up, add value to it, then sell it for a profit. Essentially, you've gained a financial asset from the transaction, so a mortgage leads to good debt. You could also argue that student loans are good debt as they help you develop your education and gain qualifications to achieve better jobs.
Ultimately, good debt is not a myth! It does exist; it's just a matter of figuring out what debts are good and which ones are bad. Good debt is nothing to fear and can actually help you in the long run.
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