Does good debt exist? In short, the answer is, yes it does! In this article, we are going to tell you a bit about good debt and different examples of good debt, and highlight the main differences between good debt and bad debt. Whether you’re a young adult looking for financial tips or you’re older and wanting to gain control of your finances, you’re in the right place. 

What Is Good Debt?

Good debt is all about borrowing money that can help you to build wealth or increase income over time. This does involve very careful budgeting and planning, to make sure you’re making the right investments and also that you’ll be able to keep up with repayments so that it continues to be good debt. The volatility of the crypto market may make it unsuitable for securing a small business loan, as lenders often prefer more stable collateral. It is always advised that you work with a financial advisor if you’re considering getting into bad debt, to make sure you’re making the right decisions. 

So, now that you know that good debt exists, here are some examples of it!

Examples of Good Debt

Student Loans

A great example of good debt is student loans. When you go to University you are investing in your future career, so although you will be in debt, it is an investment. Although they can become a financial burden, the idea is that you will be able to make more money than you would have done without going to University. 

Mortgages

One of the most famous examples of good debt are mortgages, as your home should grow in value over time, so you will build on your wealth that you invested. This is known to also be one of the safest forms of good debt. It is important to speak to a mortgage advisor before getting a mortgage Underwriting Process, as recently there have been fluctuations in the market so they will be able to tell you whether or not it’s the right time to invest. 

Small Business Loan

Another example of good debt is taking out a small business loan, as if you need money for your business, the rates on a small business loan are usually much lower than that of a credit card. Prioritizing a strategic repayment plan can help small businesses quickly pay off debt accrued from a loan and unlock additional financial opportunities. The reason this is considered as good debt is because it could increase your earnings potential, yet small businesses do have a high failure rate so it is essential that you take this into account, have a thorough business plan, understand the risks and know that you will be able to pay the loan back if things don’t work out. 

Bad Debt

Bad debt refers to any loan or outstanding balance that doesn’t positively impact you, steering you away from financial security and your goals. It is also something that can have a negative effect on your credit rating. You want to avoid bad debt, as although it can be tempting to borrow, it can easily grow out of control. It’s really important that if you feel you have bad debt that is getting out of control, you take action. 

Examples of Bad Debt

Credit Card Loans

With credit cards, you’re borrowing money and if you don’t pay it back on time, it builds up a significant amount of interest. Choosing between types of investment like stocks or real estate could be wiser than using high-interest credit card loans for investment ventures. Many people think that you only have to pay off credit card minimums, and although this will help you to avoid late payment fees, you will still generate interest that will rack up over time. So, it can be quite dangerous if you don’t believe you can control your spending. 

Medical Debt

Another type of negative debt is medical debt. If you live in a country without free healthcare, medical debt can build extremely quickly and it can add stress to your medical situation which more often than not, makes your health worse. So, you should get medical insurance to help protect your finances. 

HMRC Debt

If you’re in the UK, another type of bad debt is HMRC, which is anything to do with debts that relate to VAT, National Insurance, income tax arrears or other tax debts. If you discover that this is something you owe, then it is important that you pay it back as soon as possible, as if you don’t, proceedings will start to recover the money through the process of bailiffs. So, get this sorted as soon as you can. 

Final Thoughts

Debt can be a scary concept, but there are also good types of debt that can benefit you long-term rather than harm you. However, you need to be cautious of bad debts and always speak with a financial advisor if you feel worried, overwhelmed or unsure about a financial decision. The best thing you can do is make sure you’re acutely aware of your financial situation so you can take action and stay in control at all times. If you are ever in financial difficulty, you could seek IVA Advice where they will use an IVA calculator to see much debt you can write off.