Debt is money you owe to a person or a business. But is there good debt and bad debt? Let’s explore.
Unsecured and Secured Debt
Two forms of debt are secured and unsecured. Secured debt is secured by an asset. This means that if the borrower fails to pay the debt the lender can seize the asset. An example would be a car loan. Unsecured debt on the other hand is not secured by anything. This means that if the borrower does not repay the debt the borrower has nothing to seize. The lender would have to find other means to recoup its loss.
Revolving and Installment Debt
Debt can also be either revolving or installment. The most common example of revolving debt is credit cards. It is an open line of credit that can be used over and over again. Installment debt on the other hand is a debt that is fixed like student loans. Installment debt starts with a specific amount and the borrower pays it off over time, then it is closed.
Good Debt vs. Bad Debt
What exactly is good debt and bad debt? Some view revolving debt like credit cards as bad because it keeps people in a cycle of going in and out of debt. Installment debt like student loans or mortgages are seen as good debt because it serves a purpose and a benefit. These types of debt are said to provide some value like gaining an education and investing in an asset.
However, all debt is bad debt no matter the supposed value it adds to your life. Debt keeps you from doing the things you ultimately want to do. Buying a house may be a good investment but not paying it off burdens you with debt. Paying it off can be freeing and help you enjoy your house without worry. Going to school and getting an education is definitely an asset that will help in your career. But, holding on to student loans causes a financial burden to starting and living the life that you want. In summary some debt may be useful in getting you ahead in life, but holding on to debt creates financial stress and burden.