Good Debt vs. Bad Debt – The Line Between Investment and Risk

Debt has always received a reputation as a cause for trouble. Despite this misconception, loans can still be taken out for both good and bad reasons. Debt itself is neither good nor bad, but the sources and purpose are what determine if they were wise or wrong decisions. 

While circumstances can differ from one person to another, there is a general definition of what debt is good or bad. Here are a few examples to elaborate on the point. 

Good Debt: Property, Education, Business

Property

Home loans and auto loans are debts that are paid back monthly with interest rates on top. This debt is generally considered good debt because houses and cars are necessities that one needs now rather than later. These are considered personal investments that can improve one’s quality of living.

Loan providers consider job security and income before approving applications they receive. Rates are made to fit their client’s capacities to pay their loan back within a certain time period. These loans can be made manageable and attainable to low to middle-income earners.

Education

Education is a lifetime investment that opens opportunities. Getting a loan for a quality education will pay off depending on the student’s determination and drive to succeed in their chosen field. More often than not, those who receive a good education get good jobs with excellent opportunities for career growth. And when income starts to increase, these student-turned-working adults may be able to pay off debt after years of hard work.

Neutral Debt: Business Loans

Business 

Starting a business carries risks. It takes time to be recognized in the market as a competitor and gain loyal customers or clients.

Business loans can help cover operations for the first few months, but if there is no progress by then, it may leave the business owner with no means to pay loans back. 

This loan is only considered good if the entrepreneur can grow and scale the business. It is bad debt when the borrower does not have the proper skills, drive, and passion to keep the business afloat yet decides to take out the loan anyway.

Bad Debt: Personal Gain

Taking out a loan for something that won’t earn the money back can be considered bad debt. Borrowing money impulsively to feed desires grows nothing but pride, which will deplete when the time comes to pay the debt. 

Some legitimate banks and loan agencies offer personal loans, which are neutral by nature. Others turn to loved ones or trusted colleagues. These types of debt are not bad. What makes them bad is if there is no means to pay them back.

Conclusion

Managing debt is not always easy. Every circumstance is different, and some people come with more privileges than others. But with the right knowledge, people would often find that there are always better solutions to financial problems. Living a life free from bad debt can be difficult, but it is possible when one knows where to invest.

DebtHelpers.ca is a personal debt relief company that creates customized debt solutions for Canadians. We are dedicated to providing a range of services for every person who aspires to live debt-free. For direct help and tips from the experts, call or contact us through our website.