Difference Between Good and Bad Debt

There are many people that feel that they should not borrow at all and others that feel that lent money is theirs to do whatever they want with. Unfortunately, neither attitude is the right one and it important that we have the right knowledge about debt so we can make the right decision when we are borrowing money. It is good to understand the differences between good and bad debt and then you can have the right attitude towards borrowing.

Improving Yourself

One of the main differences between good and bad debt is what you will be using the money for. For example, you might find that you will be getting a loan to buy a house. This is considered to be good debt because you will be paying a mortgage rather than rent and a mortgage is often cheaper. You will also end up with a home to live in and once the mortgage is repaid it will be rent free. However, if you borrow money to buy some clothes that you rarely wear and then give away this will not be seen as good as they have not had a big impact on you or improved you. However, it is often not easy to determine how good or bad the lending will be just based on this. It might seem like common sense but life tends to be more complicated than this and so the decision will take more thought.

Affording the Repayments

When you take on a loan you will normally have to repay a certain amount each month, although some loans do work differently. If you take on a loan that is so expensive that you cannot afford the repayments, then you could find that you might even face court of repossession. If this is a home you could end up with nowhere to live or if it is a car you may be unable to go to work. Therefore, you need to be really careful to check out how much the repayments are and whether you can afford to repay them based on your current financial situation. You will find that if you can afford it then it will be considered to be good debt and if you cannot afford it, it will be considered to be bad debt.

Finding the Best Value for Money

It is also important that when you choose a loan you choose the one that offers you the best value for money. This isn’t just referring to the type of loan that you choose but also the specific lender that you pick. It takes a lot of work to compare them all but you will find that it will make a significant difference to your borrowing experience if you pick the right one. It will also mean that you will not pay more than necessary and this is important as well.

Checking Costs Regularly

It is also important to keep checking the costs of loans compared to yours. You may find that you will spot some new loans coming on to the market that are cheaper or that some lenders have reduced their rates so that they are cheaper than what you are currently paying. It is worth looking to see whether you can save money by switching to them. Do note any additional fees as well as the rates as some may have ongoing charges, set up fees or things like this and your current lender may have a fee if you end your loan early with them, so you will need to calculate carefully and decide if it is worth swapping.

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