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Making Money Paying Off Your Loan: How To Tell If You Have Good Or Bad Debt

  • Post category:Economy News
  • Reading time:6 mins read

Guide-savings.beThe financial world knows “good” and “bad” debts. But what is the difference? Why are some debts better than others? And in what cases can good debts become bad? explains the difference.

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The definition of the word “debts”: the financial obligations that you have towards a person, a company or another body that has lent you money. In other words: by borrowing money, you get into debt. An example: you go to a financial institution because you want to buy something for which you do not have enough money at the moment or for which you prefer not to use (all) your cash.

Outstanding debt and market value

We speak of ‘bad debts’ when the market or market value of the property for which you have borrowed is lower than the outstanding amount of the loan. A good example of a ‘bad debt’: borrowing to take a trip. Once this trip is over, you will still have to continue repaying the loan. Another example of bad debt: a home that loses its value so quickly that the outstanding debt for the loan is greater than the amount you could get from selling that home. The reverse is true for good debts. In this case, the market or market value of the property for which you borrowed is greater than the outstanding amount of the loan.

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The nature of the debt can change

Another way to estimate the nature of debts is to look at the purpose for which you are going into debt. Thus, you can borrow to buy a home. In case the latter increases in value over time and its sale brings you more than the amount you paid for the purchase and the loan, you could get a good deal. In this case, your home loan would have been an example of good debt.

Does this mean that every mortgage is good debt? No, because as we have already mentioned, the value of your home can also go down. This is the case, for example, when considerable soil contamination is observed, as a result of which the value of your home will fall below the amount you paid for it and for your mortgage.

All is relative

Moreover, it is not always possible to make a very clear distinction between good and bad debts. If you borrow for training, for example, you will need to continue repaying that loan after you complete that training. But is it bad debt for this reason? It may be that this training has allowed you to find a new, better paying job, which could earn you much more than you expected in the long run.

Of course, you prefer to borrow for a purchase that will increase in value over time, generate income, or help you generate income. However, no one has a crystal ball. You will never have concrete guarantees. Suppose you need money urgently and sell your car below market value for this purpose. Then you will borrow to buy it back. Is this good or bad debt? This is also relative…

Anyway: before going into debt again, you should check whether you will indeed be able to repay your debts. In order to minimize the costs related to possible new debts, it is in your interest to compare the offers of the different credit providers. the comparator is a good starting point for this.


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