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You may have heard of two types of debt: good debt and bad debt. “Good” debt is money owed for things that can help build wealth or increase income over time, such as B. Student loans, mortgages, or business loans. “Bad debt” refers to things like credit cards or other consumer debt that do little to improve your bottom line. These are oversimplifications. The distinction between “good” and “bad” debt has many more nuances.
It is worth re-examining this topic and understanding the new rules of the debt game. While student loans and mortgages can be used successfully to build wealth or increase your income, they are not always, or necessarily, the case. The successful use of “good” debt depends on several factors.
There are many situations in your life where you need to borrow money from someone to meet your needs. This could be the purchase of certain property or personal expenses. Your wants govern your needs, and credits help you turn those needs into demand.
When you borrow from a financial institution, your goal will define the type of loan and your income will define your ability to repay the loan. Even if you can repay it, the loan amount must be used so that it does not burden your finances.
In the case of goals, you would normally assign a monetary value and a time frame to achieve them. Financial planning is about helping you achieve your goals through good financial management.
Loans can make your life miserable if not used wisely.
This loan is usually contracted to cover immediate personal needs or expenses such as the purchase of household goods or vacations. If your income is not enough to meet your needs right away, opt for a personal loan.
Since these types of loans are only intended for personal expenses, they are comparatively more expensive than home loans and auto loans. From a financial planning perspective, this loan falls under the category of bad and avoidable.
The reason for this is that it does not help you create assets with the resale value, and secondly, the impact on your finances can be great due to the high cost of interest. There is no tax benefit on this loan.
It is the worst type of loan. Credit cards are commonly known as easy money, and that easy money, in turn, turns out to be very expensive if not used wisely. This loan is the most expensive of all.
Those looking to gamble with the repayment term and minimum outstanding amount should keep in mind that this is a surefire way to get caught in the debt trap. If not paid on time, this loan can leave a huge hole in your pocket.
Here you have to pay the ongoing interest in addition to the interest on the loan. It is understood that credit cards should be used as a convenient tool to avoid increasing the availability of cash beyond your means. This loan has an interest rate between 18% and 24%. The cost of rolling interest can exceed 40%.
In life, one is faced with a variety of circumstances in which one is forced to borrow for short-term needs.
