Personal Loans and Other Debts : Good and Bad |

Between personal loans, auto loans, credit cards and mortgage loans, it is virtually impossible to live a debt free life. Almost everyone will borrow money for something at one point or another in their lives. That means debt will inevitably be in our lives. Despite the bad rap debt has received, there is such a thing between bad debt and good debt and it is important that we know the difference.

When Debt is a Good Thing

In general, debt is considered good when it is used to better yourself, your future or your overall wealth. This is why everyone will have a tendency to get in a little debt at some point in their life.

Examples of Good Debt:

Purchasing a Home – Since purchasing your own home is considered better than continuing renting a place that you will never own, a mortgage is considered “good debt” and is not a strike against you.

Purchasing Real Estate – While you may not need real estate, it is also considered a financially sound option. When you purchase “renter” houses, you are actually increasing your net worth, especially if the rent covers the mortgage.

Receiving Student Loans – It is a generally accepted practice to obtain student loans. The idea is an education is worth the investment. Since few people can pay thousands of dollars for an education in a lump sum, student loans are considered acceptable debt (as long as you pay it back.)

Borrowing for a Business – Since most businesses take money to start up, a business loan can be a sound debt. As long as the loan is good and the business plan is acceptable, then a business loan is considered good debt.

When Debt is a Bad Thing

The commonly accepted term for bad debt is anything that is frivolous. Sometimes, we want to live outside our means. Instead of saving up the money for the cool things we want, we borrow, charge, or take out personal loans. This can lead to ever increasing debt that becomes almost impossible to get out from under.

Examples of Bad Debt:

Purchasing Vacations – While we all want to get away once in a while, borrowing to fund such excursions is a bad idea.

Charging a Wedding – Nothing gets a couple off on the wrong foot like financing a wedding. Starting off your marriage with this personal loan is not a good idea.

Borrowing to Invest – The stock market is not a good place to be in debt. You never know when the market will crash taking you and your personal loans down with it.