Good Debt Vs Bad Debt: What is The Difference?

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Introduction

The repayment of the debt always stresses the borrowers, as they are worried about the repayment. If you will tell anyone about the nature of the debt, that it can be good or bad, the person will not believe his ears. Consumers have a general perception of loan or mortgage, in short, any kind of debt is bad, and everyone must try to avoid borrowing money. This perception limits the learning and growth opportunities of organizations and individuals. Moreover, not all kinds of debts are bad; loan, mortgage, and other debts build a credit history. You can borrow money in order to meet global learning and earning opportunities. Learn the difference in order to grab the best loan option.

The Good Debt

Any kind of debt can prove to be good or bad and this depends upon the borrower. If you plan the expenditure of the borrowed money and save monthly in order to repay the loan, any kind of debt is good for you. Lending money in order to fulfill your deeds and not planning the repayment might trouble the borrower. Apart from this general ideology, a fine line between the good and bad debt is required to prevent the borrowers from the trap of the debts. The borrower can differentiate the bad and good debt based on the terms and conditions offered by the lender.

From the ease of approval to the interest rate and period of the repayment, the financial experts consider a number of factors in order to quote the difference. Lenders approve good debts only after rigorous scrutiny. The rate of interest and the period of repayment are in accordance with each other. A good debt increases the income or net worth of the borrower. Banks offer loans in order to meet the specific requirements of the user and may include higher education, purchase of machinery, property, and infrastructure. The borrower can choose from the list of the available loans in order to meet the requirements.

Education Loan

On top of the list of good debts are education loans. Higher education costs a lot and only a limited number of seats is available if you wish to plan for masters. Students can explore the federal loan options available for the graduation and post-graduation plans. The rate of interest on student loans is considerably low. Students are given sufficient time to earn and repay the loan. Generally, the period of the repayment starts 4-5 years after graduation. Education loans also provide tax saving options to borrowers.

Business Loans

For all those planning to expand the business, the biggest challenges are to manage funds as savings are all always not enough in order to meet the business requirements. Business loans are a safe and viable option for business owners in order to expand their production and service. The interest rate charged by the financial organizations’ or institutions is comparatively low as compared to the personal loan options. Moreover, the business houses get a tax rebate based on the loan amount. The period of repayment is also favorable. Some business loans are good debts.

Mortgage Loan

For all those planning to purchase a new property or build a new house for their family Mortgage Loan is the best option. The borrower pays a part of the debt as the down payment and the financial organizations’ manage the rest of the amount. The repayment terms are in accordance with the rate of the interest and the period of the repayment. Like other secured loans and good debts, Mortgage Loan also provides the borrower with tax rebate options.

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Bad Debts

Just like good debts, the terms of the repayment and the conditions for the approval of the loan differentiate the bad debts. Bad debts are usually unsecured personal loans offered by the small and private financial organizations’ in order to earn huge profits. The terms of the repayment; including the rate of interest and the period of the loan are unfavorable. Bad debts are usually very expensive and the lenders never scrutinize the application to approve the loan. Bad debts never help you improve your credit score or your credit history.

High-Interest Credit Cards

Borrowers with poor credit cooperative history are unable to get the credit cards approved. The private organizations’ extract benefits from the situation and offers them high-interest credit cards, with the higher Annual fees. The period of the repayment is usually very small and fewer benefits are provided with the credit card. This is bad debt and may cause a crisis in the future.

Unsecured Personal Loans

Small and private financial organizations’ offer unsecured personal loans to the borrowers looking for financial aid, in order to meet the recurring expenses or in case of emergency. Payday loans are the worst personal loan option, which traps the borrower in the vicious circle, and the borrower is under debt. Period of the repayment is very small and the rate of interest is very high.

The Bottom Line

The differentiation between the bad debt and good debt help the person in order to understand the terms of the loan before borrowing the money. Even a good debt can turn out to be bad for the user if the balance between the payment and repayment is not maintained. Read the terms and condition offered by the lender before borrowing any money. The bad debt is usually bait offered by the small financial organizations in order to earn a profit. For the good night options in order to build a Credit history and enjoy the benefit of a tax rebate.

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