Good debt helps you build assets that produce income. Bad debt drains your cash without providing future value. Let’s see tha various types of debts in the following section in detail.
- Home Loan: A mortgage loan is generally considered good debt. Property is a good investment when it appreciates in value. Mortgage debt is particularly good for those who buy bargains, fix them up, then resell at a profit. Mortgage interest can be tax deductible.
- Student Loans: Student loans are also considered good debt. College graduates earn 73% more than high school graduates, and advanced degree holders earn two to three times more than those with a high school diploma. Interest on student loans is generally deferred until 6 months after graduation, and interest can be tax deductible.
- Vehicle Loan: Vehicles tend to depreciate over time, especially those shiny new ones driven off the lot. Most new vehicles depreciate 20% in the first year, putting these loans in the bad debt category. However, sometimes this “bad debt” makes it possible for you to produce income, for example traveling to a job where you earn more money. You may justify having this debt, but you can probably get to work in an economy car just as easily as you can in the luxury vehicle of your dreams.
- Credit Cards: It’s no surprise that credit cards fall in the bad debt category. If you carry a balance from month to month, you’re paying more for your purchases than the original price tag. Some experts say you’re paying up to three times more, if you only pay the minimum balance due each month. Items purchased using a credit card generally depreciate in value, so you’re taking a double hit on this purchase.Credit cards can also be valuable tools to help meet short-term and unexpected needs. For example, it might be wise to take advantage of a limited-time sale on new car tires, knowing that you will payoff the card balance next month with your tax refund. The key is to match the purchase with a source of repayment. This “bad debt” turns into “not-so-bad debt” when you pay off your balance each month.
THIS CONTENT IS FOR INFORMATIONAL PURPOSES ONLY. THIS IS IN NO WAY GIVING ANY LEGAL ADVICE OR REPRESENTATION. THE INFORMATION CONTAINED HEREIN WAS COMPILED FROM VARIOUS ARTICLES. FOR ANY LEGAL ADVICE OR REPRESENTATION SEEK YOUR OWN LEGAL COUNSEL.