Debt is an important financial tool, made available to people, to help them counter immediate expenses and expand their opportunities.
Sounds total got up, cock and bull case?!
Well, we consumers have proved it so!
It is us to blame for the bad name, that debts carry.
The enormous debate surrounding good debt and bad debt has been around the corner for a long long time.
It is discussed every now and then, in several online financial portals and forums.
But very few people, in the end, can grasp a thorough understanding of the difference between bad debts and good debts, and make rightful decisions accordingly.
We at Oak View Law Group felt the need to explain this subject to the common mass of consumers, after conducting a research on the financial problems based on the analogies and comparative study of our client case histories.
We saw that most of the debtors have one debt in common, which is credit card debt. The next major form of common debt is made up of payday loans. Then comes auto loans. And, very rarely do mortgages, equity loans, personal loans, and student loans come into the picture.
This is where we figured out, that most of the debts, that our clients are complaining of, are comprising of bad debts, or deteriorating debts.
These debts have no such asset values and are a result of purchase mistakes, or unethical costs!
Hence, arises the necessity to know about good debts, bad debts, and which one to use when.
We at OVLG believe, that after reading all the points and facts discussed in this post, you should be able to differentiate debts as per their level of priority and significance and improve your net worth more than ever.
What are good debts and how do they work?
I can end the discussion right about here, by declaring that all the debts having any type of asset involved are good debts.
But, it won’t be enough to store the concept in your brain, in every minute detail. When we are talking in the language of finance, stuff needs to be broken down step by step.
First, let me give you a couple of examples of good debts. You have ‘Mortgage or Home Loans’ as the number one good debt.
Then you have student loans, which give future prospects and earning opportunities to a whole generation of college and university goers.
After which comes another form of consumer debts that can be converted into good debts with the right precision, and sensible decisions.
Why are mortgages considered to be good debts?
The answer is easy. Because mortgages have estates or fixed properties as underlying assets, and the factor called asset value, which in general other debts lack.
This asset is usually a house or in rare cases a raw land property (real estate). Tracking the economic history of the world, real estates have the potential to appreciate in value over time. Seldom have they depreciated, but that too in a very hi-fi financial crisis.
Owning a house out-right with full 100% built-in equity is a dream investment coming successful for most of the consumers.
I am not seeing any negative aspect of investing money in a mortgage or say for instance getting yourself your own residence.
You find anything to attack this notion? Comment down below, and start a discussion. You are most welcome.
What makes student loan a good debt?
Pursuing a nice field of education ensures a career boost. No doubt in that. You can say this is the sole reason why student loan takes the shape of good debt.
It won’t be wrong to state that student loan is a moral investment.
Though the student debt crisis is on the rise in this country, it’s not enough to say that student loans are bad.
Getting a loan to push your education boundaries further, can never demean you financially. Understand that knowledge is power. And, student loans just help you to achieve that power.
Therefore take out a student loan with proper planning, and pursue your education wholeheartedly.
A vintage car loan is no less than a good debt:
Auto loans are always projected out as bad luxury loans for many, because vehicle prices start to drop at a huge rate, right from the very day of purchase.
As I have said earlier, good debts work by building the underlying asset value.
When you are taking out a loan for a car or vehicle, that has the potential to become vintage in the future, then this is good debt.
Like, say you are buying a custom built Porsche 911 Carrerra, or an upgraded Ford Model 18, or Dodge Challenger SRT Hellcat. These types of cars have already got vintage and antique status due to their participation in world-class races and tournaments.
What are bad debts and how do they work?
Bad debts are in general consumer debts that are unsecured and have no backing collateral. Examples of bad debts are credit card debt, payday loan debt, or even a mortgage that’s underwater (a special case), and auto loans (unlike a vintage car loan).
These debts are a product of bad purchase decisions, and they carry high-interest rates.
Personal loans, on the other hand, can work as either bad debt or a good debt, depending on the purpose of it.
If you are taking out a personal debt for a successful business venture or anything that promises a good future return, then it is good debt.
But, if you are utilizing a personal loan to match up monthly expenses or lifestyle costs, or for traveling purposes, and anything as such, then it a bad debt!
Guess you are understanding, why payday loans and credit card debt are truly bad. That’s because these debts arise from lifestyle costs!
I am bringing this post to an end here. If you are having any problem in tackling your own bad debts, or if you need more insights on this topic, feel free to comment down, or contact us, right when you need us.
Stay happy, blessed and debt free, always.
