Debt. It has gone from something that Indians feared a couple of decades back to being a part of everyone’s lives. That said, one shouldn’t take it lightly just because debt has now become a part and parcel of our lives. There are certain kinds of debt that you should be wary of - bad debt and there are some that you can afford to indulge in - good debt.
If the term ‘good debt’ is something that’s new to you and makes you wonder what it is, then you’ve come to the right place. In this article, we’re going to take a good look at this unique term and what it means for you. So, let’s begin.
Any debt that’s used to generate income and wealth is usually referred to as good debt. This would include debt that you take on to purchase assets such as a house or a piece of land. And since land and houses generally increase your ability to generate income, the debt that you take on to purchase them are termed to be good debt.
Another major marker of a good debt is the rate of interest that it is issued at. Generally, sources of good debt tend to charge nominal to moderate rates of interest.
In addition to what you’ve seen above, an ideal example of good debt would be debt that you take on to fund your own business. Since owning a business gives you the ability to generate income and increase your net worth, it is widely referred to as being good debt. This is despite the risks and low success rate associated with starting your own business.
Another good example is education. Any debt that you take on to fund your education is good debt since the higher your education, the better your earning potential is likely to be.
As with all kinds of debt, there’s always an element of risk associated with good debt. You must have heard of the adage ‘Too much of a good thing is bad’, haven’t you? This applies perfectly to good debt.
When you overextend your debt to purchase a house or an asset, making repayment tougher, good debt would no longer be good.
This is the case with education as well. Taking out a huge loan to fund your education, where job opportunities are few and far between would no longer fall under good debt.
The classification of good debt and bad debt may not always be crystal clear as you’ve seen above. Sometimes, it can be very subjective. There are a couple of instances where a debt may be good debt for you, but bad debt for others.
For instance, taking out a debt consolidation loan to pay off high interest debts may be good debt to you since you’re getting rid of bad debt. But, for another person, it may not be so.
Also, borrowing to invest in the stock market may seem like a bad debt to you, whereas it might be good debt to someone who is well versed in stock trading and understands the risks perfectly.
Just because certain debts are categorised as good, doesn’t mean that you should take them on. It is always a good idea to conduct a thorough analysis and consider all of the factors to ensure that the debt has a net positive impact on your financial lifestyle before going ahead with it. This can not only help you stay clear from debt traps, but also allow you to manage debt in a much better manner.
Related Articles: Follow these 5 Expert Advices to Get Started with Investing | 4 Investment Mistakes New Stock Market Players Must Avoid at All Cost | 5 Rules Every New Investor Must Know Before Investing | 10 common mistakes made by SIP investors | 4 Smart Must-Follow Investment Tips for Beginners in India | Upcoming IPO | LIC IPO