Why Good Debt and Bad Debt Should be Considered Better Debt and Worse Debt – Part 1
Due to the economic crisis that hit the country a few years ago and due to the long time that the recovery is taking, a lot of people in the country are still facing a lot of trouble with their personal loan and other debts. Even worse, those who can manage to make some payments for their personal loans only pay the minimum necessary just to stay ahead of their creditors.
Things don’t improve if we consider that the amount of debt that the average U.S. citizen holds when compared to the average salary in this country is substantial to say the least. In fact, the Social Security Administration estimated that the average yearly wage of a regular citizen here is of about $41K, while the amount of credit card and of personal loan debt averages almost 16K.
Furthermore, while more than 60 percent of the population here owns their homes, a lot of them still carry substantial amounts of mortgages, with the average payment that any given individual has to make every month ranging between an impressive $700 and $1,700.
On top of these debts, most people in the country also have to shoulder one or more car personal loans, which on average cost car owners at least 8 percent of their monthly salaries. Likewise, even student, who have yet to enter the job market, are also forced to take on personal loans and student loans. In fact, studies have found that even before they graduate, most students already owe more than $25,000 in student and personal loans.
Good Debt vs Bad Debt
Based on these numbers, it would be hard to find any average citizen who is financially comfortable and debt-free. Thankfully though, there are some very noticeable differentiating factors among these personal loans and debts, which makes paying off some of them more important than the others. This better debt vs. worse debt scenario has been applied by people with personal loans since long ago.
Before the Great Recession of a few decades ago, “good” and “bad” debt were commonplace. In most cases, “good” personal loans are those with low interest rates that don’t require hefty payments every month or that are also absolutely necessary to pay, like home loans and such. On the other hand, “bad” debt, which usually include some credit card loans and other personal loans, are those loans taken because people couldn’t afford something relatively small at the moment. What makes these loans “bad” is that the product purchased start to decrease in value almost immediately, while at the same time the money used to pay the credit card installments or the personal loan repayments keeps accruing hefty interest.
The Problem With Good Debt vs Bad Debt
The huge issue about good debt and bad debt is that it is almost entirely a myth created more than a couple of decades ago.
What people needs to understand first and foremost is that whether it is a mortgage or a personal loan debt is always that, just debt, and no matter how you get it, it is always bad and difficult. thankfully though, it all comes down to the different interest rates charged by credit card institutions and by personal loan lenders.
The thing people needs to differentiate now though, is that while all debt is difficult, they can learn to manage it and to classify it into two main categories: “better” debt and “worse” debt. Better debt is a personal loan that carries a very low interest rate and that is used to get anything that adds value. On the other hand, “worse” debt are personal loans used to get something that will deprecate over time.
So, we’ll keep this like that for now. Make sure to stick for our next entry to know how to better classify your personal loans and to use this to your advantage.