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Is there good debt and what separates it from bad debt? This is one of the most asked financial questions we get on a regular basis. Unfortunately, the answer isn’t that straightforward. Sure some debt might be better than other kinds of debt but it’s really up to personal preference and where you stand financially. In order to help you decipher your current debt situation, we’ve laid out what characteristics make certain debt good or bad and how this affects your finances overall.
For most people, the line that separates good debt from bad debt is a simple one. Good debt is the kind of debt that is used to grow assets. This could be an actual asset like a house, a piece of land or part of a business. It could also be a theoretical asset like an education which won’t make you any money right away but will increase the possibility of success in your future.
If your debt is not helping you grow an asset or increasing your potential to grow an asset in the future, most people would say that you have bad debt. The most common form of bad debt is consumer debt, for most people, this would be credit card debt. Debt that you’ve accumulated through buying things, items or material goods, things that probably aren’t seen as an asset.
If you’re really interested in improving your finances or genuinely want to live within or even below your means then no debt is the best kind of debt. But for the average Canadian, not having any kind of debt is unrealistic. Like we said before it’s really up to personal preference, some items are simply too expensive to purchase with cash and some situations simply require a loan. But just as a general guideline, here are a few types of debt that you can safely consider “good”.
“Bad” debt is considered undesirable because it pays for products and services that will provide no return, meaning that it makes the borrower’s finances worse in the long run. This is particularly true because interest will be charged on your outstanding balances, meaning that you will pay more than the actual purchase price for something that didn’t help you build an asset or invest in your future. Here are two examples of debt that is typically considered “bad”.
It is important to remember that good loans will not always produce good results, just like how bad loans will not always produce bad results. For example, if you borrow heavily to invest in a company that declares bankruptcy shortly after, you are going to regret it even more than if you had used that money to buy something that you like. Similarly, a small car loan with low interest rates for a used but reliable car can serve you well in the short run, particularly if you live somewhere with poor access to public transportation. In the end, it’s you that needs to decide for yourself and your current financial situation what kind of debt you’re able to take on if any at all.
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Loans Canada is pleased to announce it placed No. 131 on the 2022 Report on Business ranking of Canada’s Top Growing Companies.
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