When applying for credit, it is important to realize that what we are doing is asking for more debt. Despite this, no one can hide from the fact that debt and credit are turning the world of today. It is therefore important to know what different types of debt are. Believe it or not, there is good debt, bad debt and, of course, “the worst debt. “
A good debt is a debt that allows you to add value to your life. They are an investment in your future and they increase the value of your portfolio. Good debt tends to pay for itself by adding to your potential income. So, while you pay the debt today, this one will allow you to reap a financial benefit in the future. Here are some examples :
- Real estate debt : Mortgages are often good debts because their interest rates are low and the real estate value tends to increase over the years.
- Student Loans : A diploma is an investment that often yields a lot more income than if you were to enter the job market with only your DES
- Business Loans : Business Loans allow you to invest in the development and growth of your business. These are often able to afford themselves quickly enough.
- Debt Consolidation Loans : These loans help reduce the interest cost of your existing debt and achieve significant savings.
Bad debts are loans that you obtain for objects or purposes that do not contribute to your financial future, or that immediately begin to lose their value. If a debt has no potential to increase the value of your portfolio, it is probably bad debt. Here are some examples :
- Credit cards : credit card debts are bad because their interest rates are often very high. When you only make your minimum payments, this kind of debt can stay with you for years. Once the balance is paid, the amounts disbursed will far exceed the value of the goods that they have purchased.
- Leasing : having a hiring-and-selling lifestyle can be harmful to your financial life. From these days you can rent-to-buy to almost anything – televisions, computers, refrigerators and even furniture. You could fill an apartment with only furniture and appliances rented if you wanted. This is a bad debt because the interest associated with these arrangements is often quite high that, once the furniture purchased you will have paid almost double its value in place of payment.
- Payday Loans : Payday loans benefit people in a most vulnerable time. These are loans without a credit check that are offered in the short term with an expensive interest rate. You borrow until your next payday, and once the money is repaid you end up without funds until your next payday, prompting you to take a new payday loan and creating a vicious circle.
- Very short-term loans : just like payday loans, these very short-term loans are nothing more than a tax on naivety. They do not do credit investigation and they charge unaffordable interest rates; the difference with payday loans is that your payments will be extended over a period of at most a few months. These lenders know that the high payments they charge will encourage you to refinance the loan mid-way, or to require a new loan as soon as the current loan ends.
- Gambling : Playing with money borrowing will never increase the value of your wallet. You may find yourself having won two or three times in a row, but this will end abruptly and you will find yourself borrowing simply to pay your gambling debts. You can quickly develop a game addiction and find yourself in a very undesirable situation. It’s the equivalent of throwing your money out the window: your financial life makes absolutely no profit.
- Tax Refund Loans : Some tax preparation companies will offer you to lend you the value of your prepayment. This practice consists of first preparing your tax return and showing you the amount of your refund calculated. They then offer you to give you back the sum immediately instead of having to wait for your refund, minus a fee, of course. This is deducted from the amount owed to you by the government. The problem here is that the fee is often higher than the cost of preparing a tax report. When the post office was in charge of the delivery of the checks, that kind of loan might be worth it, but in the age of electronic reporting and direct deposit, it’s hard to justify that kind of unnecessary spending. In addition, if unfortunately there is an error in your report and your refund does not go back to the amount borrowed, you may owe a large sum to the preparation company as well as to the income department.
“The worst debt”
Now that we have taken the time to look at the concept of good and bad debt, we must answer the important question: what is the worst debt ? And we find here that it is not a kind of specific debt that is the worst, but any that you are not able to pay. Especially if it has a high interest rate.
Why is this the case? Quite simply, a debt you can not pay can take you to a collection agency, garnish your wages, or even take you to a judge. No matter if the debt is on either of the above lists, if you are not able to pay it, it is the worst debt you can have.