Do you have Good Debt or Bad Debt?
The word “debt” is scary and the first thing we think is to run away from it.
But, that word is negative for your finances. In fact, there are debts that are considered good and that can improve your financial health considerably.
It is one that will bring benefits to your finances and will be able to recover the interest you paid to acquire it. For example:
- Mortgage loan to rent
- Loan to consolidate your debts
- Car loan, when the vehicle will help you to be more productive
- Loans to invest, as long as the return is higher than the interest
- Business loans
- Credit for education
If you take out a loan to invest, make sure that the yield is higher than the interest.
All these debts, as you can see, are aimed at increasing your income. Just remember, always, to acquire credits that have low interest rates, fixed payments and allow you to pay off early without any penalty.
Bad debts are those that are acquired in order to have a liability, that is, something that will not bring us any benefit in the future. Bad debts are those that do not bring financial benefits. For example:
- Electronic appliances for months.
- Car credit, when the vehicle does not help us to be more productive.
- Purchases made with credit cards.
Interest-free months – is also a bad debt
are also bad debts, since, if you cannot afford to pay for something in cash, it means that we must wait a little longer to buy it, because it can jeopardize your finances in the coming months.
Another type of bad debts are those with extremely high interest rates or fees:
- Personal loan for travel/vacation
- Loans with easy payments
Remember that before acquiring any type of credit, loan or paying with your credit card you should think very well if you really need what you are going to acquire and how this can affect your finances in the following days, months and years.
What to do if your debts are bad?
If by now you have realized that you have bad debt; the best thing to do is to get rid of them as soon as possible.
The easiest thing to do is to consolidate your bad debts in a credit that charges you much less interest, so that you can save on it and have more cash flow.
As for the mortgage loan, since it is a very large amount, consolidation is not an option. So the best thing to do, if you still have more than half of it, is to look for an option to change it, which should allow you to pay a lower interest rate and give you better credit conditions in general.
I am Nikesh Mehta, owner and writer of this site.
I’m an analytics and digital marketing professional and also love writing on finance and technology industry during my spare time. I’ve done online course in Financial Markets and Investment Strategy from Indian School of Business. I can be reached at [email protected] or LinkedIn profile.