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Loans - Good Or Bad Debt?
By: Jill Kane
When borrowing money it is usually because we lack the cash to make a large
purchase, such as for a car, home or education. However, an important question
to ask yourself when borrowing is if the purchase you would like to make is
creating good debt or bad debt.
Good debt is considered borrowing for something that will go up in value over
time. For example, real estate, a business or for education purposes. Education
loans can be considered good debt because it should increase your income.
Bad debt is debt used to fund something that doesn't hold its value. Some
examples would be car loans, personal loans for vacations and use of credit
cards for consumable products.
Additionally, loans for bad debt are not generally good for your financial
well-being because they usually have higher interest rates and are not tax
deductible. Good debt loans on the other hand are frequently tax deductible and
carry lower interest rates.
Ideally having no bad debt is the best. However, in some cases a certain amount
of bad debt may be ok and unavoidable.
Some financial professionals claim that it is acceptable for 10-20% of your
annual income to consist of loans for bad debt. But, going over 25% is getting
into a danger zone that may be difficult to get out of. Once you get into this
high debt range, the amount of interest paid becomes so high that it results in
a cycle that cannot be reversed.
So, just remember to take into consideration the type of debt (good or bad) you
are incurring prior to getting a loan. This advice can go a long way toward
helping you be a financially savvy borrower.
About the Author:
Jill Kane is an author for http://www.1st-low-rate-loans.com
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