When it comes to debt, there are a number of misconceptions. Some people believe that all debt is bad. In fact, there is good debt and bad debt. It is important to know the difference since most people will want to utilize good debt while eliminating bad debt. Expert debt consolidators like Hornet Partners have been helping people organize and service all types of debt for years. Below this article will show the difference between good debt and bad.
What is Good Debt?
Good debt is simply debt that one can manage and pay back in a timely manner. This debt is also used to finance something that will increase the wealth, income or future earnings of the debtor. Below are some common examples of good debt that one can utilize.
1. Home Mortgages
Since the majority of people cannot buy a home for cash, a home mortgage is an excellent way to get into a home with limited available funds. Most mortgage loans are approved according to strict lending standards. Since home values usually appreciate, this is an example of good debt.
2. Auto Loans
Most people will need an automobile in order to commute to work and get around town quickly. A properly financed auto loan will be easily manageable by the borrower. While most automobiles do depreciate, this type of purchase provides incredible time-saving value to the user as well as providing access to increased opportunity, and thus qualifies as good debt.
3. Students Loans
Education is one of the most valuable investments one can make. A student loan will allow the borrower to greatly increase their future earnings. Therefore, a student loan will qualify as good debt.
4. Business Loans
Those who start a business will want to take out a loan in order to buy inventory or expand operations. Since businesses have cash flow, the loan can usually be easily serviced. Business loans can apply to companies that have millions of dollars in assets or a self-employed individual who needs some cash to buy computer equipment. In many cases, a business loan will qualify as good debt.
While good debt is usually serviceable, it may be a good idea to consolidate these good debts into one manageable payment plan. This will allow easier management and payment of the debt. Hornet Partners has helped a number of clients manage and service their good debt.
What is Bad Debt?
Bad debt usually consists of loans that are difficult to pay back. These usually come in the form of loans with high-interest rates or debts that are riddled with payment penalties or other unfavorable terms. Bad debt can also apply to purchases of quickly depreciating assets. Below are some common examples of bad debt.
1. Credit Cards
Most credit card companies lure in new customers with low introductory interest rates. However, these interest rates can expand over 23% a year. Since this interest rate far exceeds the return on most investments and is difficult to service, this is bad debt.
2. Payday Loans
Many people in a financial crunch will go to a payday loan office to seek some quick cash. These payday loans have some of the most punitive interest rate terms available. Therefore, this is considered bad debt. In many cases, people who take out payday loans have trouble servicing this loan and end up in an even worse financial situation.
3. Unsecured Personal Loans
Those seeking money for an undefined personal use will take out unsecured personal loans. Since there is no specific reason cited for the loan, financial institutions consider these loans riskier and charge a higher interest rate. This is bad debt that can be difficult to service.
Since bad debt can cause financial hardship, it is important that these debts be repaid as quickly as possible. Hornet Partners are experts at consolidating bad debt to help their clients avoid further financial pain and potential default. By consolidating all bad debts into one payment plan, one can better service the debt.
Properly Managing All Types of Debt
Good debt and bad debt both need to be serviced in a timely manner to protect the credit rating and the reputation of the debtor. One of the best ways to service all debts is through consolidation. By organizing all debts into one payment plan, a debtor can manage their payments while lowering their overall interest rate payments.