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Understanding Good and Bad Debt

May 31st, 2023 | Share via:

How would you know that a debt is good or bad for you? Read on.


Debt has become a pervasive aspect of modern life. In many selected cases, debt is a necessary tool to achieve certain goals, such as purchasing a home or financing a college education. On the flipside, not all debt is created equal. There is always the yin and yang or so in layman’s terms, the good and the bad.

Good debt can help you achieve financial stability and long-term success while bad debt can cause financial ruin. Understanding the difference between good and bad debt can help you make sound financial decisions, while also saving you from financial stress.

Good Debt: How Do I Distinguish It?

Good debt refers to debt that is taken on for the purpose of investing in something that will appreciate in value or generate income. Practical examples of good debt include a mortgage, a home loan, a business loan, or a student loan. A mortgage is considered good debt because it allows individuals to own a home, which is an asset that typically appreciates in value over time. A business loan can be considered good debt, too, if it is used to start or expand a profitable business. Similarly, a student loan can be considered good debt because it allows individuals to invest in their education and increase their earning potential for a better future.

Good debt may also have tax benefits. Mortgage interest and student loan interest are both tax deductible, meaning that a person engaging in these kinds of debt can deduct the interest paid on these loans from their taxable income. This can result in significant tax savings and increase your disposable income.

Other than the appreciating value or the additional generation of income when having good debt, most of it have low interest rates. The lower the interest rate on a loan, the less money the borrower will have to pay in interest over time. This can save the borrower a few significant amount of pesos, making good debt one of the best and wisest financial decision. In reality, good debt is often overlooked by most typical Filipinos, and most of them fall into ….. bad debt.

Falling into Bad Debt: What You Need To Know

While good debt can be an effective way to invest in oneself and build long-term financial stability, the other side of the coin speaks otherwise. Bad debt can gradually derail your financial goals and can further lead to financial ruin. Bad debt refers to debt that is used for the purpose of purchasing something that will not increase in value or generate income. Examples of bad debt include too much credit card debt, car loans, and personal loans.

Credit card debt is often used to purchase non-essential items, such as clothing or electronics, which lose their value immediately. They say that anything of too much is not good, and that can be true with credit card debt. Car loans and personal loans cab also be considered bad debt because the interest rates are often higher, and the items purchased with that certain loan do not appreciate in value and the money used to loan is not used to put up something that can generate cash flow or generate profit.

Bad debt can cause a person to be financially burdened. It can lead to negative situations and problems in a person’s financial credibility. Late or missed payments on credit card or loan payments can lead to a decrease in the individual’s credit score. A low credit score can make it more difficult for an individual to obtain future loans, secure housing, or worse, to even get a job.

It further leads to a cycle of more debt and financial instability. High-interest loans caused by bad debt quickly add up and become overwhelming. When a person finds himself struggling to make payments, they may take out additional loans to cover those payments. This can lead to a financial problem that is difficult to break free from.

Good Debt Revealed: Applying for a Home Loan

One practical example of a good debt and at the same time, a wise investment is a home loan. This type of debt is used for the purpose of buying a home or investing in a property. While many people may view debt in general as negative, home loan is an exemption to that.

This is because home loan offers several benefits, therefore making it a wise investment option.

Applying for a home loan is considered a good debt because it is an investment in a form of a tangible asset. Unlike other types of debt, home loan is a secured type of debt in a form of a physical asset that can increase in value over time, such as a house and lot or a lot property. The money borrowed to buy a home has the potential to appreciate in value, making it a good long-term investment.

Another reason why a home loan is the best kind of good debt is that it comes with a fixed interest rate for the tenure of the loan. In other words, the borrower will know exactly how much he would need to pay towards his home loan each month. Unlike other types of debts that have fluctuating interest rates, a fixed interest rate can provide greater predictability and stability in a person’s financial planning.

While it may be tempting to take on debt to purchase items that provide immediate gratification, it is important to consider the long-term financial implications of a certain financial decision. And that is how you can distinguish the good debt from the bad debt. Before taking on any debt, it is important to ask oneself or seek a financial advice if the purchase or investment is essential, if the loan is necessary, and if the debt can be effectively managed.