What is the Difference Between Bad Debt and Good Debt?

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When it comes to debt, most people think only one thing: it’s bad. However, while this is true of what is commonly known as “bad debt,” there is also such a thing as “good debt,” and understanding the difference between the two is essential for making financial decisions.

Bad debt is typically associated with consumer debt, such as credit cards, car loans, and loans taken out to purchase luxury items. This type of debt usually carries a high interest rate and typically can’t be written off as a business expense. This means that you’ll pay more in interest than what the item itself is worth, and the debt can take a long time to pay off.

Good debt, on the other hand, is typically associated with investments. Investments such as real estate, business loans, student loans, and other loans taken out for specific purposes such as starting a business or furthering your education can be considered good debt. These types of investments can be written off as a business expense and often carry a much lower interest rate, so you’ll pay less interest over time. Additionally, the return on the investment often is greater than what you paid in interest, meaning that they can be a wise financial decision over the long term.

Ultimately, when it comes to debt, it’s important to weigh the costs and benefits of taking out any kind of loan. Consider bad debt as something that will cost you more than what you bought with it, while good debt is an investment that will either pay off in the long run or that can be used to offset the cost of something that will.