Before we start this conversation about good or bad debt, let me make it very clear, debt, on the whole, is a dismissive concept and should be brought into existence only and only when it is the last option. Going forward, a debt is categorized as good or bad based on its amount and how much will it cost you in totality.
Debts have a tendency to paralyze the long-term financial goals of people before they realize it. Debts come in all forms- from credit card bills to mortgage loans and so on. They can be really good financing instruments at one time and can prove to be uncontrolled devils if not managed properly.
Let us understand how can debt be categorized in Good or Bad Category;
Any debt which is low interest, increases your income or net worth can be categorized as good debt. This is not a universal rule, debt is a debt, it takes no time for a good debt to convert into bad debt.
There are some neutral debts as well, which are neither good nor bad. Medical debt is one such example. It is an emergency debt and generally comes without interest imposed on it. You have a certain tenure at hand to repay the medical debt before interest is imposed on the borrowed amount.
Here are a few debts which can be put under the good debt umbrella;
1. Student loan
I consider it to be good debt as it is an investment in the prospective future. Generally, student loans come at a low rate of interest. They come in different repayment varieties which can be of great help once you start repaying your loan.
Usually, one is expected to repay the loan after they get a job but that does not hold good forever. Just in case you happen to be unemployed for any reason, the repayment tenure will still start after a certain time. There is also an option to get the loan refinanced if need be.
Mortgages are a good debt as they lead you towards one of the biggest asset achievements in life- house ownership. People generally use this tool to buy a house.
There can be situations where you are unable to manage the mortgage interest, the best way out is to relocate. If you own a house at the posh area in your city, relocate to a little subtle one where property rates are not so high. This will help you in two ways, you will still have your own house and some liquid money at hand to repay or clear the debt.
Refinancing is another option if it suits your pocket.
3. Car loans
I have categorized car loan in good debt category as a car is now a necessity in the busy lives we lead. If your car is on a loan, it is advisable to clear off that loan within a maximum span of four to five years. After that, the value of your car would fall down considerably.
If you find yourself trapped in the car loan loop, try replacing your car with an affordable one which would most probably be a smaller car, but still is a car. Again, another option is getting the debt refinanced.
Huge debts that cripple your long-term financial goals, worsen your current financial situation and impose high-interest rates are bad debts. These are generally the debts which are taken in order to buy things which tend to lose value over the course of time.
It is not necessary that bad debts come in their own special category, they can be the good debts which worsened over the period of time.
High-interest rate credit cards are the biggest source of bad debts. If you own one such credit card and are able to pay off the balance regularly, there is no problem but if you are not able to keep up with the due amount by the end of the credit cycle, stop using that card.
Also, do not get any of your credit cards deactivated, this will affect your credit score adversely.
1. Personal loans
Although there may be few reasons wherein you definitely need that personal loan but getting a personal loan for something which is purely optional is not a wise man’s act. Financing a vacation is no good idea, how can you possibly enjoy something that is going to put you under debt for the next 2-3 years?
Try reconsidering vacating to a cheaper destination.
2. Payday loans
Again, a very bad choice, with payday loans you are already locking the money you will work for the next month. And the worst part is, you will possibly have nothing left out of that salary as payday loans are charged at hefty rates of interest. Sometimes, the rate of interest is as high as 200%!
If you are in such a dire need of money, try borrowing from a family member or friend but payday loan should be the absolute last option on your list when it comes to borrowing money.
It is important to realize that a debt may hamper your financial growth and goals. Irrespective of its character- Good or Bad, try to clear-ff all your debts as soon as possible. Save and grow your money before you end up paying all of it as interest. Read more about paying off debt even if your salary is low at https://www.piggy.co.in/blog/payoff-debt-on-low-salary/