Good Debt Vs Bad Debt: How To Make Debt A Tool For Wealth Creation?

Good Debt Vs Bad Debt: Debt has for the longest time been considered as cause of financial woes that overburden an indiviuals regardless of your financial staus change at any given time due to the responsibilt of paying your EMIs on time. However, while not managing debt carefully can cause inconveniences, debt in itself is not entirely a bad concept.

If  used wisely, debt as an instrument can aid in achieving your goals without waiting months or years to accumulate enough savings. But the difference between good and bad debt comes down to how you use the money and how you plan repayments.

What Can Be Labelled As A Good Debt?

Good debt is the money you borrow to build an asset, create opportunities for future income, or increase your net worth. For instance, taking an education loan for a master’s degree can help you develop new skills and explore lucrative career opportunities. Similarly, a home loan can help you create a long-term asset that appreciates in value yearly.

Additionally, good debt can also acts as funds that helps you overcome financial emergencies, provided you repayment happens aper the stipualted deadline. it timely. For example, taking a personal loan to cover medical emergencies.

What Is Considered A Bad Debt?

A bad debt is when an indiviual seeks loan for an item with no-term gain and in most instances depreciates in value over time. If you ended up purchasing a luxury label bag it would attract higher than usual interest rate, causing you to pay more than the products present value. However, even a high-interest home loan can be dubbd as bad debt for an  someone  with inability to  repay it with ease.

How to differentiate between Good Debt Vs Bad Debt?

The purpose and timely payment of your debts can determine a debt to be either good or qualify as bad.  Have a look at the key differences between good and bad debt that will make your borrowing chocies work in your favour.

Defination: Borrowing money to fund investments or opportunities that will create long-term value is considered good debt. Meannwhile, securing funds for expensive purchases from high-endfashion labels offer no long-term benefits.

Interest rates: If your seeking a loan for an asset that'll deliver considerable gains in long-term future it would attract lower interest rates. Wherelse, if a borrower securs funds of a liability its likely to attract higher interest rates.

Wealth creation: Based on your loan choices and whether it leads to wealth creation or depletion, the defination of a bad or good debt sticks.