A handy guide to help you understand the difference between good and bad debt
While a loan can make your life better in many ways, a mismanaged debt would have negative effect on your financial well-being. If you’re trying to make the distinction between good and bad debt, then keep in mind these important points to help you understand the difference better.
What is Good Debt?
The key distinction between good debt and bad debt is that the good kind adds some sort of value to your life and usually has a low interest rate. Bajaj Finserv offers some of the lowest Home Loan interest rates in India. You can take a Home Loan with them right now at interest rates starting from 9.85%.
To understand in-depth what it means to add value to your life, let’s take a look at some good debt examples.
If you take a home loan and invest it in a real estate property, you’ve made a sound financial decision as the property will most likely appreciate in value over time. If you rent out the property, it will bring in monthly returns, and if you decide to sell it off later, you will likely make a profit.
Education loans are another kind of good debt, because they increase your qualifications and, by extension, your ability to make more money in the future.
Medical loans, when taken to improve your health or the health of your friends or family, are considered good debt because human life cannot be replaced, while you can always pay off the debt over time.
Responsible use of your credit card is good debt because it can help bolster your credit score, making you eligible for loans at better rates in the future. If you’re planning to apply for a credit card, you can go for Standard Chartered Credit Card with Bajaj Finserv, where you can avail the great schemes and reward points.
What is Bad Debt?
A debt is considered bad when it adds no value to your life and has unreasonably high interest rates. Bajaj Finserv offers Home loans with incredibly low interest rates starting from 9.75%. You can apply online for a Home Loan right now by clicking here, and get it approved in just 5 minutes. Now let’s take a look at some bad debt examples.
Taking a loan to spend the money on extravagant things that neither appreciate in value nor improve your ability to pay back the debt over time is a type of bad debt.
Buying a car to help you get to work would be considered good debt because it adds tangible value to your profession, but most cars begin to depreciate in value the minute they leave the showroom; this is why taking a loan to purchase an unnecessary luxury car could prove to be a bad debt.
Irresponsible use of your credit card is considered to be the worst kind of bad debt because it wrecks your finances on more than one level. First, it will drain your funds, bring in more stress to your life, and finally make your financial life and general life harder. It will also damage your credit score and make it hard to secure loans in the future.
Dealing with Debt
Any debt can become bad debt if you don’t keep up with the payments. It’s very important that you plan out your finances in a way that will enable you to keep up with the EMI payments.
The converse is also true. If you use the loan money responsibly and make the payments on time, your bad debt can easily turn into good debt.
Maintaining a good debt to income ratio will go a long way in easing the burden on your financial life. A good rule of thumb to follow is to keep your debts around 36% of your income to ensure that you can cope with the payments with no problems.