Monday, July 06, 2020

Differentiation between debt in good and bad.

Debt is not uncommon. Often your own finances are not enough to finance your livelihood. Financing is now common, especially during your studies. Auto loans are also becoming increasingly common. Loans are required for the cost of moving. Even for your own dreams like a trip around the world, debts are made. This differentiates between different types of debt: good and bad. The debts are therefore broken down into their reasons.

What are good debts?

What are good debts?

Debts that offer added value from a future-oriented perspective are so-called good debts. For example, this can mean the chance of a good job or borrowing from a house in which your own family can live. The following forms of financing count towards good debts:

  • Student loans
  • Financing for a company foundation
  • Home loan

In addition, loans for an investment are usually cheaper than consumer loans.

Bad debt in the form of consumer loans

Bad debt in the form of consumer loans

Consumer loans enable the purchase of economic goods such as a new car, a new couch or a new television. Any purchases do not offer any added value with regard to the future. For this reason, the costs are considered bad. Likewise, the exhaustion of the MRP is to be rated as a bad debt.

Distinguish bad from good debt

Distinguish bad from good debt

Loans differ mainly in terms of their interest rate. Real estate loans in particular, at an average of 1.15%, have a significantly lower percentage than consumer loans with average interest rates of 2.45%. Interest rates of up to 18% are even customary for a overdraft facility.

In addition, consumer loans do not add value. To make this clear, the following example serves: A borrower finances a car, but this already has a loss in value of 24.2% in the first year alone. Not only is there no added value, there is even an impairment.

Avoid debt trap

Loans offer tempting opportunities to fulfill your wishes. However, the debt should always be kept in mind. Otherwise the debt trap threatens. Most of them come out of this with difficulty. Many debtors even face bankruptcy. If you want to avoid this, you should not make debts above your own circumstances and, above all, take advantage of cheap loan offers. These can be filtered out using a credit comparison calculator.

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