Good and Bad Part of Debts

In the language of commerce when someone owes money to satisfy ones financial needs he is said to be in Debt. If it was possible for going through life without taking debt, it would have been a wonderful experience, although in reality it is not possible. But all debt is not bad, thus it is customary to bifurcate the debts into good and bad.

Good Debts

The liability which one undertakes to acquire an investment is a good debt. This helps in further economic gain for the debtor. So, it is a debt for an appreciating asset. Using debt or loan for acquiring and holding an appreciating asset allows the debtor to persuade his/her existing funds, and increase his net worth rapidly. So good debts are those, which produces cash flow in future for the payment to the creditor. The above concept can be clear with the help of the following example.

Let us consider an educational loan. When a person takes an educational loan it is incurred in pursuing of a degree or a higher level of education in order to maintain or enhance his/her career. So this type of investment is fruitful for future. Because it provides the person an opportunity to increase his/her future income. So this investment, which is a part of debt, becomes a good type of debt. There are other several fields where in taking a debt becomes fruitful. So, these types of debts are called good debt and can be clarified from the following heads.

• To buy a Home - When someone takes a loan or debt for purchasing a home, it is referred to as good debt. This is because, house is an asset, that will generally appreciate over a period of time. The house produces revenue along with tax deduction for buyer, so it is a good debt.
• Loan for College or Higher Education - Today, education is an essential factor of life. In America getting higher degree is an expensive matter. In such a situation taking loan or debt is considered as a good debt. As this loan helps a person to get higher or professional education and it upgrades the person's professional skills. This helps him/her to get a better job and increases his payment potentiality.
• To pay for Medical Expenses - Sometimes people have to take loan or debt to come out of medical expenses for self or dependent one/s, in such cases the loan or debt become good debt.
• Mortgage loans - Mortgage loans are considered good option because one can borrow money and get a tax advantage. The interest on an asset can be written off that will appreciate over time.
• For buying Shares and Bonds - If a person purchases shares and bonds by loan it is good debt because it produces an income and increases the value over time. For example if the person buys a share worth $50,000 by his/her loan and after 5 years the share is worth $100,000. At that time it can be said that the debt is good for the person because it has increased his/her income.

Hence, debts or loans that helps in creating future assets, increases debtors' wealth over the long term and helps him/her towards a financial security for future are all good debts.

Bad Debts

Any debt pertaining to depreciating asset is a bad debt. Whereas good debt provides income, bad debt is related to expenditure. In case of bad debt people invest their loan or debt in such fields, which are not income generating. This concept can be cleared with the help of the following example. This can be cleared from the following examples:

In case of any purchase by a creditor, which provides no income for him then, it is classified as a bad debt. It is an unnecessary expense by the debtor, which provides no income and depreciates in value. Debt for something which depreciates and provides no income would be considered as bad debts. The following are some examples: