The difference between bad debt and good debt

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When is borrowing money a good idea?

Debt is usually talked about as a bad thing – it is generally seen as something that people should avoid getting into, or aim to get out of as quickly as possible. But this is the wrong way to think about debt. Not all debt is equal, and there are actually many forms of debt that are common, healthy, and can even be making you money in the long run. That’s where the concepts of ‘good debt’ and ‘bad debt’ come from. 

 

Bad debt

As a rule, debt is considered bad when it doesn’t have the capacity to build wealth in the long run. So borrowing money for material goods that depreciate in value is generally considered bad debt. This can include cars, clothes, and other consumable goods that don’t generate money – instead they sit in the garage / wardrobe / cupboard and simply get older and less valuable. Credit cards are also an example of bad debt thanks to high interest rates and usually high costs. There are some exceptions to this – including consolidation loans and credit cards, which can be extremely useful in lowering your monthly repayments. 

 

Good debt

If bad debt is money borrowed that doesn’t generate wealth, good debt is the opposite. This includes money that can help strengthen your earning potential, such as borrowing money to go back into education or to open your own business. In the long run, you’ll be better off as a result of your borrowing. Good debt also includes borrowing money to buy items that increase in value over time – such as investing in property. A home loan is a good debt because (if you have conducted proper market analysis) the property will increase in value over time and you can have more money than you started with once you’ve paid off the debt. Real estate can also make you money in the meantime if your property is positively geared

 

Things to remember

It’s important to remember that borrowing money at any time should be approached with caution, and that you should get professional insights before signing any terms or contracts. When it comes to property investment, going to a bank will tell you how much you could borrow, not how much you should borrow – so remember to speak to a financial planner so you can be sure that your not over-leveraging.

 

Reventon financial planning

The Reventon team are experienced in home loans and financial planning, so are able to advise you on exactly the amount you should be borrowing and the best place to direct your funds, so you can be sure that your debt is the safest it can be. Get in touch to book a free consultation.

 


 

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