Debt can be a scary thing. For some people, it’s just not something they want to deal with at all. However, for others, debt is an unavoidable part of life that needs to be figured out and managed to move forward financially. The key is understanding what type of debt you have so you know how to handle it properly.
DEBT IS NOT JUST AN OBLIGATION TO REPAY A LENDER
It’s a commitment to your future.
When you take on debt, you’re committing to the fact that you want to buy something more than you have right now. You’re saying that this thing is worth more than the money in your bank account because it will bring you joy or make your life better in some way—and that’s pretty awesome!
It can be hard to think about credit cards as anything other than a source of stress and anxiety, but they can also be incredibly helpful. They allow you to buy things you need and want without saving up for months or years. You can take care of your families and yourselves in ways you wouldn’t otherwise be able to do if you didn’t have access to credit cards.
The key is ensuring that when you take that loan, you are thinking about how much money you have left over after paying off what you owe each month. That way, you’re not throwing away everything else that’s going on in our lives, you are using it responsibly, so it doesn’t become one more thing keeping us from living life fully!
DEBT CAN COME IN MANY FORMS
Debt can be good or bad. The key to determining whether it is good or bad is whether the debt is being used to invest in something that will make you money. If so, the debt is good because it has a positive return on investment and makes you more financially secure.
But if the debt is used for something that will not have a positive return on investment, then it’s not worth it because there’s no reason for someone ever to borrow money when they know they won’t be able to pay back what they owe.
TYPES OF DEBT THAT USUALLY CARRY THE MOST INTEREST
These are credit card debt, student loans, and personal loans
Credit card debt: The interest rate on credit card debt can be as high as 20%.
Student loans: Federal student loans typically carry a 6.8% interest rate, but private loans can have higher rates. It’s important to understand the differences between the two types of loans and how they will impact your financial future if you don’t pay them back in full before their due dates arrive.
Personal loans: Personal loans are often used for major purchases like cars or homes. Most people who take out personal loans also choose to pay them off quickly with low monthly payments over several years instead of taking advantage of more extended repayment periods that come with lower initial interest rates but higher overall costs in the long run.
MORTGAGES ARE OFTEN CONSIDERED “GOOD DEBT”
Because they’re backed by something with value, and the interest rate is generally low compared to other types of loans.
Mortgage loans are typically used to purchase a home with inherent value that can be sold if necessary. The interest rate on your mortgage loan is generally fixed, so you know what you’ll pay each month. This makes it relatively easy to make payments, and you can even deduct the interest on your taxes each year.
Just because your mortgage is “good” doesn’t mean you should take out as much as possible. In fact, there’s a good chance that taking out too much could end up hurting you financially in the long run.
Mortgages can be bad debt if you’re not careful. If you buy a house without doing enough research and planning, or if you don’t have a plan for making your payments once they come due, you could end up with much more stress than you bargained for.
HOME EQUITY LINES OF CREDIT
A home equity line of credit is a form of debt that uses your home as collateral. This means the bank will only lend you money against the value of your home. If you default on your payments, the bank can foreclose on your house and sell it to recoup their losses.
Home equity lines of credit are often used for renovations and improvements, like adding a room or bathroom to accommodate an aging parent who wants to move in with you after retiring. They’re also commonly used for college tuition and medical bills that insurance won’t cover, but only if those expenses come out-of-pocket rather than being covered by insurance plans like Medicare.
CAR LOANS
Car loans are considered a good debt because they’re backed by something with value. The interest rate on car loans is generally low compared to other types of loans, making them an excellent way to purchase a car or motorcycle. Car loans can also be used to buy boats, RVs, and other recreational vehicles that you may not want to purchase outright.
CREDIT CARD BALANCES
Credit card debt is the type of debt you want to avoid at all costs. Interest rates are high, and it’s easy to get into debt with these cards. It is also hard to get out of credit card debt because you can use them for everyday purchases, such as gas and groceries. You might think that charging something on a credit card and then paying it off would be harmless, but once you start racking up interest charges, the balance will multiply and cause trouble down the line.
OTHER CONSUMER LOANS
Other consumer loans include student loans, personal loans, payday loans, and credit-builder loans. These types of debt typically have higher interest rates than other forms. They also have the advantage of being secured by an asset, a home, or a vehicle, so that if you stop making payments on them, you’ll lose your collateral. Therefore, these types of debt can still be dangerous if more money is owed than what the asset is worth.
KNOWING YOUR DEBT CAN BE A GAME CHANGER!
Knowing if your debt is good or bad can be a game changer when planning your finances! If you are in debt, you need to know what kind of debt it is. This will help determine if the debt is good or bad and whether it’s something that should be paid off as soon as possible.
Good debt is what helps you reach financial goals and build wealth over time. Good debt includes student loans, mortgages, and credit cards used only for investments (like buying stocks). These loans can increase the value of your assets, home, or job prospects over time, so they’re worth taking on!
Conclusion
Ultimately, it is up to you to determine whether or not your debt is good or bad. If you are struggling under a mountain of bills and credit card debt, it may be time for changes in your spending habits. On the other hand, if you have a mortgage and some other loans helping build wealth through investment opportunities, then there is nothing wrong with having these types of debts!
If you’re looking for expert analysis of your present finances, productive counsel to create or revise plans to accomplish your financial goals, and candid assessments along the way to your financial success, Bernd Financial Group can help. Our experts will meet with you to discuss your goals and objectives. Then we’ll walk you through how we can help you achieve those goals by providing unbiased advice and tailored recommendations for your needs. Schedule your free initial consultation appointment today.