What is the difference between good debt and bad debt? Any examples?
I realize good debt is reported to increase your net worth. Debt is debt, isn't it? Why call debt good when you don't have cash flow?
I suppose some might say that having some amount of debt will build your credit, which is true. For some reason, owing money makes you more attractive to banks than being able to pay your bills. They want people who will be making payments for life, so what's good for the bank isn't necessarily good for you. Sure, paying your debts might hurt your chances of getting a house or car loan, but I would still argue that no debt is the only kind of good debt.
If you were in debt for a business that was going to make you a lot of money that would be classed as good debt. Buying expensive clothes ,unnecessary, items on your credit card is bad debt
Freecamping gave a very good example. I think good debts would be a home mortgage, business loans, and maybe even car loans - as long as you make the payments on time. They're good because, if worse came to worst, you could sell off those assets, hopefully at a profit, so you can pay whatever you still owe and walk away with money in your pocket. Owing money on things you can't resale for a profit (as Free mentioned - clothes, etc) or anything which will only depreciate in value (trailers, dirt bikes, etc) would be considered bad debt. That's how I think most people would see it. To me, bad debt is simply buying anything on credit or taking out a loan for something which isn't a necessity. I believe it's better to save up the money and pay cash for things like clothes, televisions, and even my motorcycle.
Historically an example of good debt is real estate investment property. Ideally the property values go up overtime. (The tenant's rent pays the monthly mortgage while the landlord gets tax deductions for the interest on the loan and for any work/repairs he or she makes on the property.)
In other instances people went into debt to buy a fixer upper property and flip it to make a decent profit.
The vast majority of successful entrepreneurs use OPM (other people's money to build wealth). Very few of them climb to the top without borrowing money or going in debt.
Credit card debt, owing money on consumer products like clothing, jewelry, furniture, cars/accessories, TV & entertainment equipment are all examples of bad debt. These things don't increase in value and there are no tax deductions.
Good debt means you're in a position to sell, divest, or borrow against the principal. No one can borrow money against clothing.
Some debt is good. Examples of good personal debt are mortgages, student loans, and financing a car. Generally, good debt is used to purchases goods and services that can increase wealth. For example, student loans enable you to get the education and training today to reap a bigger paycheck tomorrow.
On the other hand, some types of debt are bad. Examples of bad personal debt are credit cards, payday loans, and overdraft protection. Why? Bad forms of debt are generally used to purchase goods and services that have no lasting value. For example, credit cards are often misused to finance daily living expenses, clothing, holiday gifts, vacations, or a trip to the casino.
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