In order to afford big ticket items, such as homes and cars, most of us need to take out a loan. There are two types of debt, good and bad. In this article, we define what both of these terms mean.
Good debt is a loan that you invest into something that will grow and give you returns on your investment in the future, such as shares. Another example is a mortgage debt, as your property will increase in value over time and provide you with yield. Investing in good debt loans will reward you overtime, as your initial investment will grow.
Bad debt is a loan that you spend on something that is depreciating and won’t give you a return in the future. Examples are credit cards, cars and vacations. Even though you are receiving the benefits instantly, such as a new car or going on vacation, these loans cost you more money over the long term.
Not all debt can be easily segmented into the good or bad debt category. Someone’s good debt may be someone else’s bad debt. It all depends on your own financial situation and other factors to determine whether your loan is a good debt, or a bad debt for you.
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