GOOD DEBT VS BAD DEBT- COMPLETE GUIDE.

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GOOD DEBT VS BAD DEBT- COMPLETE GUIDE.

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In this, we will talk about ''good debt versus bad debt'' but firstly understand the meaning of good debt then after bad debt. Good debt builds wealth with strategic investments. That means borrowed money utilised for investments or purchases that could result in good returns or long-term financial benefits. Debt of this kind is frequently linked to investments that support revenue production, wealth accumulation, or career and personal advancement. Here are a few typical illustrations of wise debt: Mortgage Debt: Purpose: Borrowing money to purchase a home. Rationale: Real estate has the potential to appreciate over time, providing both a place to live and an investment that may yield returns in the future. Student Loans:     Goal: Borrowing is to finance skill development and education.    Justification: Investing in education is an investment in future income since it can increase earning potential and employment prospects. Business Loans: Purpose: Obtaining financing to start or expand a business. Rationale: Building or growing a business can lead to increased income and long-term financial success Investment Loans: Goal: Borrowing is to finance investments in bonds, equities, properties, and other financial goods. Justification: If investment returns surpass loan interest, borrowing costs may be outweighed by the potential for returns. Real Estate Investment Debt: Goal: Borrowing is to buy investment properties. Justification: Investing in real estate can yield rental income and increase in value over time, offering a passive income stream and the possibility of capital gains. The key characteristic of good debt is that it is used to acquire assets or investments that have the potential to grow in value, generate income, or provide other long-term financial benefits. BAD DEBT: "Bad debt" refers to borrowed funds that are used to finance purchases or expenses that do not contribute to long-term financial well-being and may lead to financial difficulties. Unlike good debt, which is associated with investments and assets that can potentially yield positive returns, bad debt involves borrowing for non-essential and often depreciating items. Here are some common examples of bad debt: Credit Card Debt for Non-Essential Items: Purpose: Accumulating debt through credit card purchases for luxury goods, entertainment, or other non-essential items. Rationale: Credit card debt tends to have high-interest rates, and using credit cards for non-essential items can lead to financial strain. Payday Loans: Purpose: Short-term loans with high interest, often used for immediate cash needs. Rationale: Payday loans typically have exorbitant interest rates, making them a costly form of borrowing that can lead to a cycle of debt. Auto Loans for Depreciating Assets: Purpose: Financing the purchase of a vehicle. Rationale: While a car may be a necessary purchase, taking out a high-interest loan for a rapidly depreciating asset can result in negative equity. High-Interest Personal Loans for Non-Essentials: Purpose: Borrowing for vacations, luxury items, or other non-essential expenses. Rationale: Personal loans with high-interest rates for non-essential purchases can lead to long-term financial consequences. Debt for Consumer Electronics: Purpose: Financing the purchase of expensive gadgets or electronics. Rationale: Electronics often depreciate quickly in value, and financing them through high-interest debt can be financially burdensome.


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