In some cases, certain debts can be good for your financial future. “Good” is the kind of debt you can benefit from over the long term. A good example of this would be a mortgage that you can afford comfortably. Although a mortgage is a debt that you will have for 15-30 years, there is an advantage to it. If you own a home, you can build up equity that pays off in the long term in money. If you make your monthly payments for your mortgage, add equity to your home.
Another form of good debt is a student loan – provided you graduate and achieve a long-term career in your field. Once you have paid out your student loan, you will continue to benefit from the training you have received as you earn more and more money with your salary.
Business loans and mortgages can also fall under this good debt shield. Business loans may be able to finance a project that will create prosperity for you in the future. Handyman loans are used to increase the value of your home as you make upgrades. After all, good debt is all that will bring you wealth in the long run once it has paid off.
Basically, the term bad debt suggests the uncollectible debts and therefore, they are worthless to the creditors. Generally, the loan turns into bad debt after every attempt to collect it fails. Thus, the bad debt is the product of debtor going to bankruptcy or where the cost of pursuing the debt is more than the amount of debt. However, once the debt is designated as bad, the company will write it off as an expense.
What is Bad Debt?
Generally, the companies make their sales on credit since that helps them boost up the sales. However, sometimes, they sell the products to customers who have less than desirable credit. Nevertheless, the companies who make such sales to estimate the number of sales that is expected to become bad debt. Generally, this is found on the allowance for the doubtful accounts. However, when a debtor develops bad debts, he or she will find the credit rating declining. This will make it difficult for them to access further credit from licensed money lender, banks and other legal institutions.
So, it is very important that you manage your debts competently to avoid hassles in subsequent times. Fortunately, there are some options for you that will make it possible. Among the options, the debt consolidation is one of the most effective plans. Though it can ranges from the extremes, the chances of the financial ruin is unlikely and you may well get out of trouble with this.
There is a wide range of vale of debt consolidation. Now, the one suitable for you will depend on different factors such as the amount you earn, the amount you owe and also, the type of debt that you have. However, it is important to remember that the debt consolidation is a rather complex process and there are certain dos and don’ts that you have to keep in mind to make the most of it.
Good Debt Vs Bad Debt
In everyday life, most of us would not have enough finances in one go when it comes to paying for our apartments or children’s college education. Hence we borrow in one form or the other to get the expenses meet.
Debt is not a simple concept to comprehend, but in fact is a bit difficult one to get hold of. Ideally, as per financial experts’ statements, a person’s total monthly long-term debt payments – which includes credit cards and mortgage – should not exceed 36 percent of his/her gross income for a month. This is the benchmark mortgage bankers take into consideration while appraising the creditworthiness of a potential borrower.
It is very easy to spend far more than what one could afford. It is interesting and intriguing that a large number of people does exactly this and fail to recognize that they are heading down in an abyss – the deeper you sink, the more difficult will be the chances of a recovery. That is unbridled spending. But to avoid debt is not a smart option either. If properly handled, debt can be a money-spinning as well. That brings us to the concepts of Good Debts and Bad Debts. Let us see what are the differences between good debts and bad debts?
The secret of acting smart with the money is all about learning to discern between good debt and bad debt. Unfortunately, this is something that most people around the world fail to be experts in. Good debt is something that helps improve your financial position or net worth. That is, in simpler terms, a good debt increases cash flow. That is, mortgage debt, for example, is good debt. You are borrowing money from someone, but you’re getting a tax advantage so that you are able to cancel interest on an asset that’s gaining in value over time. Also, you can live there.
On the other hand, bad debt can occur when you buy something that goes down in value immediately. That is when the thing that has been brought on credit does not have the potential to increase its value. Purchase of disposable goods or durable items or, as commonly found, the use of higher interest credit cards can lead one into bad debts. Ideally, a debt-to-income ratio of a person shouldn’t go above 20 percent. That is – while adding up all of your non-mortgage loans, credit cards, and outstanding charges – it should not exceed 20% of the annual income. If it goes beyond the 20% mark, that is bad debt and it doesn’t go down well in his/her credit reports even if payments are made in time.
To conclude, debts can be productive if properly and rationally exploited. It is financially draining to incur bad debts but if you could gain more by investing the borrowed money than the interest associated with the credit , then it is a good debt which is useful once gotten from a licensed money lender. Managing one’s debt and hence the finances might need a bit of brain scratching. But it is not that enigmatic for a common man to comprehend. After all, it is no rocket technology. It is all about learning to manage your finances!