Good Debt vs Bad Debt (Use Debt to Get Rich)

An average citizen is over USD$38,000 in debt, and according to CNBC the number does not include the biggest debt, ‘home mortgages’. What’s worrying is that there is a trend where more people are getting deeper into bad debt.

Today, more than 53% of the working class are stressed over debt according to PWC.

But should you be worried about having too much debt?

If you are like me, most parents tell us that all debt is bad, and we should keep ourselves away from debt. Debt is the monster that keeps us awake at night. And if we are not careful, we will be in deep financial trouble.

But not all debt are bad, some debt are good and can help you secure your financial future.

In fact, good debt is how the rich build their riches and wealth. Like a secret society, this form of debt is less known to commoners like us. Thus the rich get richer and the poor get poorer.

Let’s have a look what’s the difference between good debt and bad debt.

What are Good Debt and Bad Debt?

Good debt is the money you borrow from an institution or an entity that is used to help you build wealth or increase your income over time, the debt will benefit you financially in one way or another.

Bad debt is the money you borrow that does not benefit you financially such as consumer debt and credit card debts.

The different use of debt creates the rich and the poor.

The rich use good debt to help them build wealth, while the poor use bad debt to finance a lifestyle that is beyond their capability.

Here we will further explain the difference between Good Debt and Bad Debt.

What is Good Debt?

Good debt is a type of debt that can help you generate income and build your net worth over time. Good debt is debt such as student loans, mortgages, or business loans, money that people borrow to help them increase their net worth.

Good debt is what makes the rich become richer, and here are some examples of good debt you may want to consider.

Business Loans

Business loans are given to people who want to start their own business but do not have the financial capability to make their business ideas into reality.

If you want to get very rich and wealthy. Start your own business. You have much better chances of becoming wealthy by starting your own business than being an employee.

An employee fulfill the dreams of others, a business owner let others help them fulfill their dreams.

But this doesn’t mean to ask you to quit your 9-5 job today and start a business. You can always start a side hustle. A side business can give you both the benefits of having the security of a steady paycheck with your job and the money potential of a business.

You can check out our post on passive income later and read about it as well. But for now, let’s focus on business loans.

Business loans are usually obtained from a financial institute such as banks, where they will assess your application with a set of stringent criteria. As the risk involved to the borrower defaulting the loan is higher. These loans are tougher to get and may require a sound business plan to be presented to the lender.

As illustrated in my other article on Traits of Successful Startup, only one in four businesses will survive the first 5 years in business.

But if you have a Rich Mindset that makes things possible. Ambition and determination of Jack Ma, the CEO of Alibaba.

With a little luck and not fearing the hard work, borrowing money to start your own business could be the best investment you’ll ever make.

Home Mortgages

Home mortgages are installment loans and are generally viewed as good debt. When you are not overly leveraged, mortgages are secured loans and are often seen as a sign of financial stability by the financial institutes.

Nonetheless, when you take up too many mortgage loans and become overly leveraged, it will be very bad for your finance and it will become a bad debt, thus it is important for you to strike a balance in the amount you borrow for your home loan.

Depending on how you utilize your mortgage loan, this can be both good debt and bad debt.

Mortgage can be both good debt and a bad debt

A home mortgage loan is good debt if you are not over-leveraging and living within your means.

The house you live in is generally not your asset but is a liability as they take money from you. And if you are over-leveraging a home mortgage loan will become a bad debt.

Regardless, we need a place to stay and we are only given 2 options

1. Buy a house with a home loan
2. Rent a place and pay your landlord monthly

Owning a house instead of renting one can be beneficial to you both mentally and financially.

When you buy a house and got a mortgage loan. Your monthly payment to your house is to build equity, instead of just going to a landlord. This helps you to build a nest egg of home equity which can help you to build your net worth, making a home mortgage loan a good debt.

But if you buy a house and overstretch your finance, the same home mortgage loan will become a bad debt as you are exposing yourself to the risk of being over-leverage.

Thus, it is important for you to know your numbers before you buy a house, or apply for a home mortgage loan.

You can simply find out how much you need to pay for your monthly loan with a simple Mortgage Calculator you can find online.

Mortgage loans are a great tool where the rich makes money

If you buy a house and rent it out, it is an asset as it brings you money day-in-day-out which makes a home mortgage a tool to help generate an income.

People such as Grand Cardone author of The 10X Rule build a portfolio of over 4,000 apartments using mortgage loans. And his latest book, How To Create Wealth Investing In Real Estate showed us how to do it!

Student Loan for Higher Education

Student loans allow you to get an education which increases your long-term earnings potential. Investing in yourself helps you to become more competitive in society, so you may increase your chance to get promoted.

On average students who borrowed to study owned $35,051 when they graduated according to CNBC.

While the numbers may be pretty huge. Because some schools and courses are much more expensive than others.

Getting educated helps you to get a fatter paycheck, and you increase your earning potential for the next few decades which shows to be a good investment in yourself.

If you have a degree, you will most probably earn 66% more than those who don’t, as reported by wgu.edu.

Nonetheless, you will always want to prioritize your loan payment and aim to pay it off as fast as possible.

The interest rate of a student loan can be quite high, ranging from 4% to 10% per annual after your graduation.

If you are looking for the best ways to repay your debt, you can check out our other article to learn how to plan your debt payment with a Simple Guide to Get Out of Debt Fast!

You will definitely enjoy that article, I promise. But first, let’s continue to explore good and bad debt.

What is Bad Debt?

Bad debt is a type of debt people take which leads to a decrease in their net worth over time. Bad debt is debt such as consumer debt and credit card loans, money that people borrow to help them fulfill their wants that is beyond their means.

Bad debt is what makes the poor become poorer, and here are some examples of bad debt you may want to avoid.

PS. Setting a budget for your daily expenses is a sound way to avoid bad debt.

Payday loans

A payday loan is the poster child of all bad debt, as it is the worst type of bad debt that can permanently damage your financial health.

A payday loan poisonous little monsters that can grow into the king of all monsters in a matter of months. Usually small dollar amount of less than $500. These loans are designed to be due at your next payday.

With fees of over $10 to $30 per $100 borrowed, payable per month, a payday loan can grow into a huge debt within a matter of months.

A payday loan has an Annual Percentage Rate (APR) of over 404% to 1,378%.

This means if you borrow $100 today and pay your lender 12 months later at a 404% APR. You will have to pay $404.56 in 12 months’ time, with $304.56 as interest. If the APR is 1,378% it will calculate to over $1,378.58 in 12 months’ time.

To put it into perspective, Warren Buffett the legend of Value investing has an annual return of approx. 28% for the last few decades. This rate of return has made him $85.8 Billion and one of the richest men on Earth according to Forbes.

A payday loan is basically legal loan sharks that are there to take your money in broad daylight!

Credit cards

Coming to the second place, we have Credit Cards. These little pieces of plastic can ruin your financial health. These can be really bad debts depending on how you use them. 

Have you ever been confused with how the interest rate is calculated or the idea of the minimum payment?

Figuring out how the credit card works can be really confusing. And this is exactly what these financial institutes want!

If you have forgotten to pay your credit card bills on time, good luck pal.

Because you will be in for a surprise for your next bill.

Remember that brand new 60-inch high definition smart TV you brought last week? Say you got really lucky and found one on sale for just $2,999, and you put on your Credit Card with the 19.9% interest rate over a 36-month payment plan.

You will be paying $111.30 per month for the next 36 months. At the end of 36 months, you will have paid $4,006.80.

That is $1,007.80 in interest, enough for you to pay for a round trip to Hawaii. I think that is a really expensive way to watch Jennifer Lawrence or Brat Pett in high resolution don’t you think?

The average credit card debt per household in the United States is $16,883! And an average number of credit cards per person is 3.1.

These are some stunning and scary statistics.

Credit card debt, especially when taken on for unnecessary purchases such as chasing the latest version of the iPhone, or getting branded goods that you couldn’t afford is undoubtedly bad debt.

Car loans

This is more of a grey area, as you may need a car to get to work or sent your kids to school.

But do you need to drive a Mercedes Benz G-Class to achieve that? Or do you just need a Toyota C-HT?

The type of car you choose to buy can make an auto loan a necessary debt, or a very bad debt.

A debt for a need and a debt for want is different.

• Need: Is something you required for your daily life
• Want: Is something that is good to have

New cars depreciate as soon as you swipe your credit card for your purchase. New care on the average decreases in value by 10% on the first day and a total of 15 to 25% in the first year as reported by finders.com.

This means you will be 10% poorer the first day you buy your brand new Mercedes Benz G-Class.

So, when you are buying your first car. Always check if that is what you need and not what you want.

Paying interest on auto loans for years on a purchase that falls in value every single day is harmful to your financial future.

You can always choose well-maintained used vehicles. The decline in value for a second-hand car will be much less than their new counterparts.

Want to be in control of your debt?

Read ‘The Total Money Makeover by Dave Ramsey. Dave’s book is a New York Times Best Seller which teaches money management.

What is the primary risk of incurring debt?

Debts are money that is borrowed from a lender, the borrower needs to fulfill the debt obligation where the person needs to return what is being borrowed according to the agreed terms and conditions, such as the principle together with an additional interest rate payable over a stated period of time.

If the borrower is not able to fulfill their debt obligation, the debt defaults, and collateral will need to be repaid instead.

Often, when we take on debt. We are making an assumption that the future is good and typical of the results of the past. But in this world, there are no guarantees.

• A business loan doesn’t guarantee business success.
• A college degree doesn’t guarantee a great job after graduation.
• A mortgage loan more than you can afford can be a disaster in the making.

Furthermore, the stress from getting into too much debt can lead to mild to severe health problems.

Nonetheless, debt when being used well does have upside potential.

Therefore, before taking on any debt, it is always advisable to carefully consider your ability to service the debt.

Should you have debt?

Good debt can help you when you use it wisely.

Bad debt will always ruin you if you are not careful.

It is your responsibility to be conscious of the type of debt you are taking. Debt is basically future money that you have to return one day.

But the right amount of good debt can increase your wealth and help you secure your financial future. Learning about good debt is only the first step to success and riches.

Your discipline to follow your goals and stay away from the bad debts that make the rich wealthy.

Question is:

Are you up to the challenge avoid bad debts and learn about how to use the good debt wisely?

Check out the wide selection of books that will benefit you in My Library Here.

“More you Read, More You Earn.”

Taking your First Step is always hardest, But it is the Most Important Step to Greatness

Take Control Of Your Life Now!

Read Also:

• 7 Streams of Income to Build Wealth Now! (Powerful Income Ideas)
• How to Create Passive Income With Your Expertise Today (5-Easy Steps)
• How to Create a Budget for Beginners (Personal Finance Budgeting 101)
• How To Use The Debt Lasso Method To Pay Off Debt (Debt Free)
• How Much Do I Need to Save For Retirement at 55, 60, 65? (Retirement Calculator)

Join 900+ BUDDIES who are growing their wealth with our weekly Income Newsletter