Bad Debt Versus Good Debt

Improved-CreditThe average United States household has thousands of dollars in debt, and that does not include housing or mortgage debt. The typical household that owns at least one credit card has well over $15,000 worth of debt. While being too much in debt is certainly troublesome, not all debt is bad. Here’s a look at good debt versus bad debt.

 

Types of Bad Debt

 

  1. Car loans. Owning a car is a must these days, but many people get into car loans where they end up paying thousands of dollars more than what a vehicle is actually worth. As soon as the car or truck is driven off of the lot, it begins to depreciate. If at all possible, save your money and pay cash for a vehicle. You will save thousands of dollars in interest.
  2. Credit card debt. If you do not pay your credit card payments in full each and every month, you should know that you will wind up paying thousands of dollars in interest. When you do not pay a balance in full, the remaining unpaid amount is subject to interest rates upwards of 20 percent. The $100 pair of jeans that you just had to have will end up taking you over a year to pay off if you choose to make just the minimum payment. Excessive credit card debt leads to serious financial problems like foreclosure and bankruptcy.

 

Types of Good Debt

 

  1. Real estate debt. Owning a home has many benefits. Most people buy a home and live in it. Real estate can also be used to generate a profit. Renting a property for more than the monthly payment can generate an income. Some will even buy properties and sell them for a profit. Regardless, holding real estate debt has long been considered favorable.
  2. Student loan debt. Student loans are considered good debt, since those who take them are investing in their education. There is a positive correlation between a higher education and an individual’s earning potential. An investment in a degree can pay for itself within a few years of employment.

 

There is some gray area between good and bad debt. For instance, using a car title loan as a form of debt consolidation can help someone by providing lower overall monthly debt payments, but still leaves the person with debt. Embassy Loans of Florida, for example, has helped thousands of customers obtain car title loans for a variety of reasons. Consolidating debt makes sense for many people. To learn more about good and bad debt, speak with a financial services representative.