Could so-called “good debt” really be bad for you? – Digital journal

NEW YORK – October 22, 2021 – (Newswire.com)

Categorizing your debt as “good debt” or “bad debt” can provide some personal comfort when making minimum monthly payments, but these classifications are not always accurate. There are times when you can have too much debt, whether good or bad. An inability to pay what you owe is never a positive thing.

There are times when good debt can be bad for you. To understand this on a deeper level, let’s take a look at four types of debt that normally fall into the “good” category. They are:

  • Mortgages
  • Student loans
  • Loans for job skills programs
  • Commercial loans

Filing them as “good” all the time is a trap that many borrowers fall into. They aren’t clearly bad, like credit card debt and payday loans, but there are circumstances in which taking out a home, school, or business loan can hurt you.

1. The mortgage trap

Once upon a time, home buyers could pay a certain price for a home and have the security of knowing that the home’s value would rise at some point. In the 1960s, for example, you could buy a house for $ 10,000 and sell it in the 1980s for ten times that amount. This is no longer the case. Home values ​​are high right now and there is no guarantee that they will increase. They could come down.

We call this the “mortgage trap”. Financial professionals classify mortgages as good debt because you get something of value when you take out the loan. However, if you’re going to lose money when the property depreciates, that’s no good.

2. Education doesn’t always pay

The fast food industry is saturated with the broken minds of college graduates who went to school for the wrong reason. Paying thousands of dollars in student debt for a degree that won’t earn you a job is not a good thing, yet these loans count as “good debt”. They can be, but only if your education contributes to getting a better paying job or a job in a specific field.

3. No job is secure at the moment

Loans for job skills programs can be good or bad. Diversifying your skills might open up new opportunities for you, but what if you are in a dying industry? Technology and automation are making many jobs obsolete. Training for the wrong job falls into the same category as choosing the wrong major in college, leaving you in a lot of debt with few options.

4. Debt is not the only way to finance a business

Americans are brainwashed into a culture of debt from a young age. We are taught that borrowing is necessary for success in life, which is why many new entrepreneurs seek to finance their businesses through debt. It is often a mistake. MBA programs teach their students concepts such as “lean startups” and “equity sharing”. These eliminate debt and businesses are always successful.

Another often overlooked consequence of corporate debt is that it reduces profit margins. You don’t get free money to fund your business. The loan must be repaid, which puts your business at risk of default if you can’t find the money. It’s best to stay light, operate debt-free, and hire investors for an equity stake if you need cash to grow.

Try “useful vs unnecessary” instead of “good vs bad”

It’s good to have a guideline, but the concept of “good debt versus bad debt” is outdated and inaccurate. Circumstances dictate the effect the loan will have on you. Instead of looking at the simplistic view, let’s try to rate each loan as “useful” or “unnecessary”. If the money you borrow will make you money, this is useful. If not, it falls into the other category.

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