We live in a world in which we all want access to lines of credit, but nobody wants to owe their soul to the bank. However, there are certain types of debt that, in fact, can be advantageous over time. The challenge lies in distinguishing a good debt from a bad one, and managing your good debts intelligently.
A good debt is one that we acquire for something that will increase its value and improve our lives in some way. Therefore, good debts are fundamentally investments in our future. On the other hand, bad debts do not really contribute to improving our lives in the long term.
There are certain types of debt that are considered good debts, such as loans for business, for studies, mortgages or loans for equity investments. But, these debts can become bad if the circumstances are not right. It is very important that you bear in mind that there is nothing that is absolutely safe or guaranteed to be a good debt, because market conditions, interest rates and many other variables can change over time.
Business loans are considered good debts because they are an investment in your future as a business owner. Borrow money to invest in your dream, it is a good quality investment, because nobody will work harder than you in the growth of your own business. As the business grows, it is expected to grow considerably more than the loan you initially needed.
Even so, for a business loan to become a good investment, you will need a persuasive and compelling business plan, an exceptional product or service, and an important work capacity. If you have a lack in any of these areas, the business may not survive, let alone develop. Sometimes, a business’s success has nothing to do with these factors. Sometimes, everything depends on the market and luck, both factors over which you have no control.
Credits for studies
A professional degree or a university degree are generally good debts, because they are investments in your future. People with academic training have more and better options to find employment than people who do not have a secondary or university education, and generally also get much higher salaries.
However, there are cases in which there is a lack of demand for certain professions. Sometimes, there is a large number of students graduating and not enough jobs for all of them to get one. In this type of situation, emigrating or choosing a job in a field other than the specialty of your studies may be necessary.
Mortgages are good debts because a house is a quality investment. Real estate tends to increase in value over the years and mortgage interest is usually low compared to other types of loans. Whenever you rent a house, you must pay the rent every month without the possibility of obtaining a profit from the money, but when you have just paid a mortgage you will be the absolute owner of the house and you will not need to pay any more money.
With this in mind, mortgages can become bad debts. When people buy a house, the intention is for the property to increase its value, but sometimes the opposite occurs. Sometimes, the neighborhood can become undesirable over time, or something is built nearby that affects real estate and diminishes its value.
Real estate investment
Many times people buy real estate as an investment or to rent them, so that they can make money with their investment, which is a good debt. Generally, the rent paid by the tenant covers the payment of the mortgage or a large proportion of it.
Unfortunately, a good proportion of the tenants do not take too much care of the property they are renting, and in some cases they inflict excessive damage to the property. This can cause the value of the investment to decrease and the owner has to pay thousands of pesos in repairs.
It is important to remember the fact that, although we may have a good debt, these can always become a bad debt. Another factor to consider is that, as with anything else, too much of something is harmful to you. When you are deciding whether to take on a good debt, make sure you are not overloading your capabilities and that you can take care of the payments comfortably. Never ask for more than you need, because there are no guarantees, even in regard to a good debt.