Posted on Tuesday 02 October 2018
The word "debt" alone is enough to make people cringe. Which is quite understandable. After all, he bad side effects of debt are extremely well-documented. It can take decades for some people to escape its clutches, and for many people, repaying debt can be a lifelong struggle. Basically, it's not the best way to live. In fact, it's the opposite.
For these reasons and more, debt is overwhelmingly viewed as something you should avoid at all costs.
However, various financial experts believe that certain types of debt can actually help you. This is known as 'good debt'.
What Qualifies as Good Debt?
If you want to build your credit score, you’ll need to handle some amount of debt. Debt has to the power to destroy your credit score, but also has the power to build it up. It’s for this reason we can divide debt into two categories—good debt and bad debt.
Bad debt is defined as purchases on credit which don’t ultimately increase your value. For example, a new car will depreciate by 20% in the first year. Even if you sell your car a year later, you will never make your investment back.
You could classify this purchase as bad debt.
Good debt, on the other hand, will make you money in the end. For example, taking out a personal loan to open an online shop could be considered good debt.
As long as you pay it back, you'll be good to go. Basically, if you are falling into debt for a little period to pay it right back, that is considered good debt. This will help you raise your credit when you do make your required payments back. So good debt is something you plan and do by choice.
In many cases, having a degree opens up doors to better job opportunities and an overall higher quality of life. Lots of young adults take out student loans in order to pursue higher education. With an education, you can get a job with a higher salary, meaning that a student loan is an investment that will generates revenue in the future.
Many people, however, are debating whether or not an education is worth the price tag. Tuition is at an all-time high, and the rough economy can make it difficult to find work after graduation. Student loans may be harder to pay back than you think.
Additionally, once you get a job, your salary will be largely determined by your field of study. An engineering degree and a philosophy degree entail two entirely different pay grades.
Having a degree will definitely move your job application up in the pile, but whether or not a large student loan is good debt or bad debt depends on how you go about it.
As the job market becomes more and more competitive, many people are opting to start their own enterprises. Starting a business requires money, and while angel investors, venture capitalists, or even family and friends can help get you started, many choose to take out loans.
There are overwhelming benefits to being in business for yourself. Financial freedom is just the tip of the iceberg. However, like higher education, entrepreneurship debt can be a two-edged sword. If your business fails, you’ll have to pay back your loans as well as any subsequent interest, leaving you worse off in the end.
So if your business fails, then you won't really be in good debt but actual debt. So a really good tip here is that starting a business is risky, buying a business might not be so bad. It's better to always buy revenue versus starting something from scratch.
Obviously, to each it's own and buying a business might not be the right thing for someone. However, our goal is to expose you to different things so you can make the choice that is best for you and your loved ones.
At the end of the day, listen to your own inner voice and your gut to make any decisions. They say all our answer embedded in our hearts anyways.
While certain types of debt have the potential to yield benefits, there are never any guarantees. Taking on any kind of risk always comes with challenges and pitfalls. Borrowing capital to pursue ventures has worked out for some, but devastated others. Ultimately, everyone has to determine whether or not they are willing to take on debt, and make the decision they think is best for their own finances. Be sure to talk to a trusted financial advisor before taking on any kind of risk.
If you get a payday loan, you should be especially diligent about paying all the fees on time. This is basically the best way of doing things not matter who you are. This way, all debt will eventually be good debt.