Is There Such Thing as a Good or Bad Loan?

There are instances wherein getting a loan becomes necessary for various reasons. However, what people fail to think about is that not all debts are considered bad loans. Rather, there are instances wherein getting a loan is a better and more cost-effective option in the long run. This article delves into the details of when a loan becomes good or bad.

Good Loans

Technically, good loans are defined as the money you borrow to generate income and eventually increase your net worth in the future. The financial experts behind suggest that you consider these types of loans when making big investment purchases that can eventually have a positive impact on your overall financial standing. The notable things that are worth going into debt for are listed below.

Student Loan

A student loan is considered a good loan because you are getting in debt to enhance your skills and knowledge and eventually get a degree or be certified. As soon as you finish the course, there is a greater chance for you to be hired or use your skills to generate income. Apart from being able to pay back the debt that you have incurred while studying, you are also increasing your net worth through the income that you are earning.

Real Estate Mortgage

Buying a home is considered a big purchase that is worth getting into debt for. The reason behind this is that the value of a property tends to increase over time. This means that after you have fully paid your mortgage and decide to sell your property, later on, you can earn a significant profit from the sale. On the other hand, even if you don’t decide to sell, your property can still positively impact your net worth because it is a tangible asset that increases in value particularly if it is well-maintained.

Business Loan

When you get a loan to start a business, you can consider yourself getting into good debt. This is because your business can, later on, generate ample revenue in the future which can not only cover the loan that you have taken out but become a stable source of your income too. With a self-sustaining enterprise, your business then becomes an asset that increases your overall net worth.

Bad Loans

In general, bad loans are those that involve borrowing money that is spent on depreciating assets. Some of the assets that depreciate include cars and electronic gadgets, which means that over time, their value will be significantly less than what you have borrowed to buy them. Some examples of bad loans are listed below.

Car Loan

Because the value of a car depreciates as soon as you drive it out of the dealership, getting a loan to buy one is typically considered a bad debt. For this reason, it is better to be more practical in buying a new vehicle. For sure, you may need to have one to get you to and from work, but this doesn’t mean that you need to go for the most expensive one in the market. Keep in mind that you won’t be able to earn back the money that you have spent for the vehicle as a car depreciates over time.

Other Consumables

It is also considered negative to get into debt for certain expensive consumer goods such as electronic devices and gadgets, or even clothes, shoes, and bags. After some time, the value of these consumer goods decreases to even lower than half of what you have originally spent to acquire them. In this case, not only did you spend a significant sum on the product, but on the interest and fees for taking out a loan as well.

Credit Card Debt

Ideally, you should only spend the money that you have. In the case of a credit card, you are already spending money that you don’t own. Multiple credit card transactions can easily get you drowning in debt that is quite challenging to rise from, which is why this is considered a bad loan.

Credit Card Debt

Yes, there is such a thing as a good or a bad loan. While it is ideal to be free from any debt, getting a loan sometimes becomes necessary. Just keep in mind to go for good loans that will work in your favor in the future rather than get into various bad debts that can significantly hurt your financial status. The key is to effectively recognize when the need for a loan is inevitable because determining whether or not a loan is good or bad still depends on your financial situation as well as various other factors.