Bad Debt verses Good Debt

Understanding bad debt verses good debt is key to determining which debt to pay down first, second and so forth.

Bad debt

This debt includes unsecured loans and secured loans for depreciating assets.

These debts should be at the top of the list for paying off.

Some people use debt to augment their income and live at a higher lifestyle than they can afford.

This behavior, frequently leads to serious financial troubles; and in chronic cases can lead to bankruptcy. The uncertain economic times we live in today compounds the problem even further.

One of the primary enablers of high debt is our constant indoctrination by the media that we deserve things. The media spends billions a year and it has a dramatic effect on our behavior (whether we realize or not). How many times have you heard:

You deserve a new car, or a vacation or a new big screen television!

Unsecured Loans-
Credit cards and other unsecured loans usually have significantly higher interest rates than other loans. These high interest loans should be paid off as quickly as possible.

Spending this money is deceptively simple. And, the benefit comes immediately, but the financial pain comes later.

For example, it is easy to swipe a plastic card and take home a 40 or 50 inch big screen TV. However, paying for that luxury can cost dearly in interest (and financial worries) over time.

Although you purchased a product with a credit card, that item is not used to secure the loan. That is why these interest rates are usually high. Those who have a poor credit rating, will pay even more dearly in interest.

Secured Loans for Depreciating Assets
Car loans, other and other vehicle loans are examples of secured loans. These are usually depreciating assets. The interest rates on these loans may be relatively low (especially during the current economic downturn) however you are still paying out interest that is better in your pocket than with a finance company.

Good debt

Good debt is debt that is used for legitimate appreciating assets. Starting a well planned business, or investing in an appreciating asset is a reason to consider debt. Some of these types of debts are tax deductible (so the effective interest rate is lower).

Having said that, be careful not to fall into the trap of going into debt out for a business (or appreciating asset) that isn’t well thought out. The more debt you are considering, the more time and effort needs to be invested in determining if you should use debt for the venture.

Final Thoughts – Bad Debt verses Good Debt
Assertively paying off unsecured high interest loans first, secured loans second and then any business or appreciating asset third will help save a lot of money.

A side benefit is the feeling of empowerment when you take ownership of your debt and the subsequent retirement of it.

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