Understanding Good Debt And Bad Debt | Money In Minutes

1. UNDERSTANDING GOOD DEBT AND BAD DEBT Loans are always seen in the bad light, they are considered to be a huge liability on an individual but it is not the only truth. Loans are a kind of liability but it is not always bad to take a loan. There are many kinds of loans, such as personal loans, short term loans, long term loans, etc. And all these different loans are taken to fulfill different needs or desires. A loan can help you in emergencies and also eliminate your temporary cash crunches. Moreover, it can play a crucial role in fulfilling your dreams of owning a car or house. But before you borrow, it is very important to know a few things, of which knowing your exact requirement and analyzing yourself for the repayments are the most important ones. You can always apply for a loan but to not fall into the vicious cycle of a debt trap, you need to know a few things. Being unaware of these things can lead to a big financial mess. So, let’s discuss those. Knowing The Difference Between Good Debt & Bad Debt Good Debt A loan taken for a sensible investment for your future or the one which makes your financial status stronger in the long term is considered to be a good debt. It never hampers your future growth and always makes a positive impact on your overall financial position. Good debts are only taken when there is a genuine reason, be it in any form, a personal loan or short term loan. Whenever you want to know that if your loan is a good debt or a bad debt, just ask yourself one question, will you gain anything valuable in the end? If your answer is yes, then you should certainly go for it. For example, if you take a home loan or a car loan, then it is good debt because after the full repayment of the loan amount you will get the ownership of that particular house or car. Other examples of good debts are: ● Home Loan ● Car Loan ● Education Loan ● Mortgage Loan ● Business Loan Bad Debt A loan taken for not a valid reason and mostly drains your money is considered to be a bad debt. Bad debts can also be defined on the basis of the loans that have no real prospect to go for. They are just used to fulfill temporary desires.

2. Mostly, bad debts are in the form of unsecured loans like ​personal loans​ or payday loans and thus have a high-interest rate which results in high EMIs. Though, these types of loans taken for a genuine reason do not fall in the category of bad debt. Examples of bad debts are: ● Taking a personal loan for just going on an unaffordable trip. ● Borrowing money to buy luxury goods which are not of much use. ● Swiping your credit card now and then for shopping and purchases which are not necessary. Why Is It Important To Avoid Bad Debt? Often an unsecured personal loan​​or a very short-term loan​​like a payday loan has a very high-interest rate. Credit card repayment interest rates are also unconditionally high. You should always be prepared to pay these types of loans on time and prevent them from turning into bad debt. To avoid such condition one should think and analyze a few things before applying for the loan, such as: ● Is opting for a personal loan the last option to fulfill the need of the hour? ● Do you really have a genuine reason to apply for the loan? ● Always compare the interest rate for the loan which you are looking for with all the lenders. ● It is good to have self analysation of your repayment capacity before you apply for any loan amount. Understand And Analyse The Loan Before You Go For It The foremost thing you should do is to decide whether your reason behind applying for a loan is genuine or not. Any loan applied for a genuine reason, whether it is of high-interest rate like many unsecured​​short-term loans​ is justified. For instance, if a personal loan is taken for a medical emergency, it is totally alright to avail of it even at a high rate of interest as money can never be bigger than somebody’s life or health. Whereas, if a loan is taken to buy an expensive designer dress that costs in lakhs to only wear once is an example of bad debt. As already said, not all loans are bad debt some debts are worth going for as in the end, you get the value in return for which you paid. If any loan which you are planning to avail, cannot be justified in terms of requirement, purpose, interest, and repayments, such loans are always a bad loan. So it is a must to understand and analyse the loan before applying for it. This was all about the basic knowledge of good debt and bad debt. You now know what they are and what is the difference between them. Moreover, you also know why you should always beware of being trapped in bad debt. Now, whichever loan you apply for, just do a proper analysation beforehand and you will be always on the safer side. Original Source: ​https://blog.moneyinminutes.in/understanding-good-debt-and-bad-debt/