People often don't realize that there is a difference between a 'good' loan and a 'bad' loan. There are often good reasons to take out a loan. Student loans, home mortgages, and in some situations, automobile loans can be excellent investments for the present and future. There are, however, also many situations where borrowing money is a bad idea.
Many people make a distinction between good and bad debt. Any type of a loan assumed with a poor credit rating is usually a bad idea. The reason for this is that the loan itself costs too much money. The rate of interest paid on most types of loans is directly related to the credit rating of the borrower. Borrowing money when having a bad credit history is not advisable.
As well, consider the type of debt being explored. Very short term,
high interest loans should always be avoided. These include credit
card debt that cannot be paid off immediately, payday loans at very
high rates of interest, and others. The price paid for this type of
debt is typically far too high for anyone to responsibly manage.
Individuals who assume these types of debt inevitably jeaproadize
their credit history.
Most people have some type of loan or debt in their lives. Examples
include home mortgages and college loans, and for many, car loans.
The important aspect to examine before assuming any loan is your
ability to pay the loan itself off, not just the 'monthly minimum'.
Financial experts generally agree that no individual's debt load
should exceed 35% of their monthly income. Attempting to carry to
high a loan or too much debt is a recipe for personal bankruptcy.
Personal bankruptcies have been on the rise over the past decade,
and one of the primary reasons for this is due to people assuming
too much debt that they are unable to handle.
Before considering any type of loan, closely examine the interest
rates and shop around. Only consider a loan after closely examining
your monthly income to determine if you are able to properly service
the loan. Understand the terms of the loan and how much the money
will cost over the period of time covered by the loan agreement.
Never consider a loan if you intend to pay only the interest. If you
cannot put money toward the principle of the loan every month, do
not borrow the money.
When you are considering a loan for any reason, think about whether
financial experts consider the debt 'good' debt or 'bad' debt. Some
examples of each follow.
'Good' Debt
1) Home mortgage
2) Education loans
3) Automobile loans (sometimes)
Keep in mind that for any loan to be considered 'good' debt, it
should clearly contribute in some way to the accumulation of assets
or future investments.
'Bad' Debt
1) Furniture that you cannot pay for immediately
2) Vacations that are not paid for before they happen
3) Appliances that cannot be paid for immediately
4) Unplanned or excessive entertainment and restaurant expenditures
5) Any expenditure made on a credit card that cannot be paid for
immediately
6) Borrowed cash at extremely high interest rates
An important note about point #5 is that many financial experts
believe that any debt assumed on a credit card, even if it can be
paid off at month's end, is 'bad' debt. This is because many people
buy things they don't need, and spend money they don't have to, as
opposed to putting this spare money aside into loan repayments,
savings, or investments. Every person's goal should be to have some
unspent money at the end of every month to help build a sound
financial future.
