Good Debts and Bad debts!

May 5, 2014

Good Debts and Bad debts!Financial independence is what everyone aspires for and unfortunately most of the people find it difficult to reach the target. It is being a great struggle for most of the people to make both ends meet and the struggle is greater when they need to meet additional expenses due to loan repayments. To manage the debts, it is essential to first understand what good debts and bad debts are. With determination and proper planning, you can clear your debts whether they are good or bad and reach your target of financial independence soon.

The purpose of the loan determines whether your debt is good or bad

The loans are obtained for various purposes such as purchasing home, or vehicle or for medical treatment and house repair and so on. The loans availed for purchasing homes are considered as good debts as the loan is worth the purchase which increases in the value. The education expenses and loans for investing purposes are considered good debts. These loans are worth repaying with interest. However, if you are financially sound and can make home purchase or spend for education without the support of loans, the loans can be avoided. If you can get grants or scholarships specified for the students to support higher education, you can avoid loans.

Part time jobs offer good support while you need finance for your higher education. With grants and scholarships and support from the family members and part time earning, you can avoid student loans. However, purchase of homes is not possible for most of the people without the support of loans. Since the real estate value keeps appreciating, the loans due to the property purchase can be considered as good debts. Buying vehicles with the support of loans cannot be profitable. You pay more for the vehicle if you make the purchase with the support of loans. Besides paying more than the real rate of the vehicle, the value of the vehicle also gets depreciated over the years.

When you purchase home with loan, you gain by the purchase as your asset value gets increased by the time your loan is cleared. When a vehicle is purchased with the help of loan, you stand to lose as the vehicle value gets depreciated by the time the loan is fully settled. Even if you dispose the vehicle, you cannot expect to get any profit through the deal. It is advisable to settle your vehicle loan at the earliest. Paying more towards the interest can be avoided. Borrowing for business can be profitable if you are sure of the scope. Before applying for business loans, it should be ensured that your business proposal is sound and your plans are strong.

Whatever the purpose of the loan is, the amount that you avail should be within your affordable means. Minimizing the term of the loan reduces the amount you need to pay towards the loan interest. If you need to apply for loans for purchasing home, you must be specific about the short term loans bad credit amount. Buying expensive houses with the support of loans will only increase your burden. If you find the repayments unmanageable, you might tend to apply for foreclosure. This cannot be considered as good debt. Size of the loan should never exceed your affordable limits.

Leave a Reply