Wednesday, March 15, 2017

Good Debt vs Bad Debt: Understanding The Difference

Not all debts are created equal. Learn how to understand the difference.

Our culture tends to view debt as a horrible prospect that should be avoided at all costs. Statistics paint scary pictures of debt in modern America, stating that Americans collectively owe billions of dollars in credit card debt, mortgages, and other types of debts. So as to avoid becoming bogged down by debt's great burdens, some people swear off all types of debts so that they live financially solvent lives. However, some types of debts can actually be helpful. First Bank of the Lake is here to help you understand the difference.

Wait - There's Such Thing As "Good" Debt?

Yes, there is! A good debt is money that you choose to borrow as part of a well-informed, well-educated decision. Good debt helps to put you in a favorable situation that you would not otherwise be able achieve. By borrowing the money now, you are able to work towards a better situation in the long run.

Mortgage debt is a perfect example of good debt. Taking out a mortgage allows you to purchase a home that you would otherwise not be able to purchase. In addition to serving as a place to live, your home is a financial investment - when the time comes, you will ideally be able to sell your home for more than your original purchase price. Depending on how much your home's value appreciates and the health of the housing market at the time that you decide to sell, you may be able to turn a profit of several thousand dollars. 

What Makes A Debt "Bad"?

Unlike good debt, bad debt is debt that puts you behind in the long run. Steep interest and copious fees end up costing you far more than the original amount borrowed, without anything to show for it in the long run. 

Credit card debt is a common example of bad debt. Unlike a mortgage, credit card debt does not offer any long-term benefits. In fact, it offers just the opposite. Racking up credit card debt can significantly hurt your credit score, the high interest charged by credit card companies will ultimately cost you far more than the original amount borrowed.

How Can I Know Which Is Which?

It is important to be realistic and honest with yourself about what types of debt are helpful and which types are not. Before taking out a loan, ask yourself the following questions:
  • What long-term purpose will this debt serve? 
  • How much money will this end up costing me in the long run?
  • Will I be able to make this money back by selling my investment?

Asking these questions can help you identify the consequences taking out a debt will bring, and you can use this information to determine whether or not it will help you or hurt you in the long run.

First Bank Of The Lake - A Community Bank That Cares

At our community bank at the Lake of the Ozarks, we don't try to sell you a loan or service you don't need. Not only that, but we make all of our decisions right here at home, and we use judgment and compassion when evaluating customer requests. Visit our website for more information about our bank in Osage Beach MO.

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First Bank of the Lake - Striving For Excellence
Member FDIC. Equal Housing Lender.

Located at the entrance to the Osage Beach Premium Outlets!

4558 Osage Beach Parkway
Suite 100
Osage Beach, MO 65065

(573) 348-2265

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