The Difference Between Good Debt and Bad Debt
There is Good Debt and Bad Debt, Learn More About Both HereOne of the more important financial concepts is that of good debt and bad debt. Debt itself is any money that you borrow and need to pay back later. This could be in the form of a loan that you pay back in installments, or it could be a revolving line of credit where you're only required to make a minimum payment every month (although it's always smarter to pay more than the minimum). So, how can you distinguish between whether debt is good or bad? Here's a guide to how they differ.
What Is Good Debt?Good debt is when you borrow money to purchase something, and whatever you purchase will build more value than what you pay in interest. Some of the most common types of good debt are:
- Student loans
What Is Bad Debt?Bad debt is when you borrow money to make a purchase that likely won't offer you greater value than what you pay in interest. Here's an example:
- You go to the mall and buy an $800 leather jacket using a credit card.
- You don't have the money to pay off the purchase in full, and instead you pay a portion of it every month for a year.
- Your credit card had a 20-percent annual percentage rate (APR), and you ended up paying $160 in interest, or $960 total for the $800 jacket.