A debt is a financial obligation that must be repaid with interest. There are two types of debts: good and bad. Good debt is when you borrow money to invest in something, such as a business or home improvement project, which will eventually grow your wealth over time. Bad debt is when you borrow money for an immediate expense, such as a vacation or shopping spree.
Good debt vs. Bad Debt is a topic that has been discussed many times. This article will go over some examples of good and bad debt, and how to tell the difference.
I despise debt. I despise the sensation of owing money to anybody. I was constantly told as a child to avoid debt like the plague, but I didn’t pay attention, and by the time I was 25, I was almost $1 million in debt! Some lessons have to be learnt the hard way. As much as I despise debt today, it’s important to remember that not all debt is created equal: there’s good debt and bad debt. The majority of us have an excessive amount of bad debt. I believe we might all benefit from a review on what defines good debt vs bad debt.
a good loan Good debt is debt secured by assets that generate revenue for you at a higher rate than the loan’s cost (interest). The hurdle rate is a metric used by large companies to evaluate if an investment is profitable. Simply put, the hurdle rate is the cost of capital. If the threshold rate is 15%, then only investments or purchases that bring in more than 15% are considered “good debt.” If you’re going to use a credit card for “good debt,” make sure you get a decent return!
Good debt contains everything you really need but can’t pay for in full without depleting your financial reserves, in addition to favorable returns. However, from a cash flow standpoint, you should only take out loans that you can afford to repay on a monthly basis. A great illustration of this kind of debt would be purchasing equipment for your company. The income generated by most equipment pays for itself, so arranging a lease or finance arrangement with reasonable monthly payments is a smart use of good debt.
Defaulted debt Bad debt, as contrast to good debt, does not provide an income that is higher than the loan’s interest. Debt for items you don’t need or can’t afford is also considered bad debt. The majority of these purchases not only fail to provide a higher return than the interest cost, but they also generate no return at all! Some even result in a cash flow deficit. Most significantly, bad debt hinders your ability to expand your company.
Your capacity to distinguish between good and bad debt will decide your financial success in company and in life. I’ve met a number of company owners that have severe debt issues, but I’ve also met a lot of people who avoid all debt. Both kinds of business owners will have limits in terms of what they can do with their company. Accept excellent debt. It will provide you with the necessary leverage to take your company to the next level.
Business Credit Services, Inc. contributed to this article.
An example of bad debt is when a company borrows money and does not pay it back. A good debt is when a person borrows money for something they can use now, like an education or a car. Reference: what is an example of bad debt.
Frequently Asked Questions
What are 3 examples of good debt?
Some examples of good debt are student loans, car loans, and mortgages.
What is an example of a good debt and a bad debt?
A good debt is when you borrow money to purchase something that will increase your income. For example, borrowing money to buy a car so you can work more hours at your job. A bad debt is when you borrow money to purchase something that will decrease your income, for example, buying a car so you can work less hours at your job.
Is a car loan good or bad debt?
A car loan is considered to be bad debt because you are borrowing money against something that will not be worth the amount of money you owe.
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