Generally, debt can be divided into two categories: good debt and bad debt. Before you take on any debt, you need to determine whether the debt is good or bad.
In this article, you will learn what good debt is, how it differs from bad debt and some examples of each. Knowing these facts can help set you up for profitable real estate investing.
So, what is good debt?
Good debt is any kind of debt that helps increase your net worth or income over time. Here are some examples of good debt:
Student loans: Generally, the more educated a person is, the greater their earning potential. There is a positive correlation between education and the ability to find work. Better educated individuals stand a higher chance of being employed in well-paying jobs.
Mortgages: Though home values rise and fall, real estate investment has historically proven to be profitable. You can make money from residential or commercial real estate by renting it out. As you pay off the loan, you build equity in your property and sell it for a profit a few years down the line. Homeowners are also entitled to a wide range of tax breaks. You can deduct mortgage interest payments, depreciation, maintenance costs, property insurance, advertising expenses, professional fees, and more.
Business loans: Money that you borrow to invest in a business can also be categorized as good debt. While being your own boss is often psychologically and financially rewarding, it can be very demanding. Like paying for a technical or college degree, beginning your own business comes with many risks. However, your chances of success will be enhanced if you select a field that you are knowledgeable and passionate about
What is bad debt?
When you borrow to purchase a depreciating asset, it is considered a bad debt. If something doesn't generate income or increase in value, you should not borrow money for it.
The following are some examples of bad debt:
High-interest loans: This could include unsecured personal loans or payday loans
Credit card debt: This is considered a bad debt due to the nature of things that credit cards are used to buy. Never use credit cards to buy everyday items like food or clothing.
Car loans: While a car makes it easier to get around, taking a loan to buy one is not a very good idea. As soon as the car leaves the seller's lot, it starts losing value.
Before taking a loan, think twice. Is it good debt or bad debt? Make a smart choice about borrowing and avoid headaches in future.
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