Some types of debt are harmful to you, but some are generally considered good. The reason for that is some debts are acquired to build wealth or to invest in the future.
For example, a debt incurred to invest in the future is generally considered a sound financial decision and better than taking debt to pay for something you don’t need at the moment.
Below are common types of debt considered to be “good debts”:
- Student Loans
Education is an essential aspect of life and is considered an investment; a student loan is an excellent example of good debts.
- Business Loans
If you borrow a considerable amount of money to supplement your business’ financial needs, that is good debt, and that decision to invest in a business is a good idea.
- Real Estate Debt
A mortgage is one good example and is highly popular for young adults due to the loan terms and duration. Additionally, real estate property values increase over time; therefore, it is considered good debt.
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Other Types of Debt Which Are Considered Bad Debt
Debts that do not contribute to your financial wealth in the future are considered bad debt.
- Credit Card Debt
The most common types of debt are acquired thru credit cards and are often considered the worst. Credit card is very easy to use when purchasing goods and carries high-interest rates. Many people can only pay the minimum required payment every month which costs accumulating interest charges onto the balance.
- Payday Loans
Without strict credit checks compared to other types of loans, payday loans are easily acquired. Payday loans are often short-term loans with incredibly high interest rates.
- Personal Loans
This is the most often used to purchase goods for:
- Home renovations
- Large ticket items such as appliances
- Or to pay off other debts
A personal loan is very attractive for many reasons, including:
- Can be used for anything
- Can be obtained easily.
- Can be for a significant amount.
- Fixed-rate, fixed length of repayment, fixed monthly payments.
- Lower interest rates compared to payday loans and credit cards.
- Debts Owed to the Government
Money owed to the government is also considered a bad debt. Common types of debt owed to the government include:
- Income Taxes
- HST/GST remittances
- Benefit repayments (CERB repayments)
- Defaulted OSAP loans
- EI or Employment Insurance penalties and repayments
- Pension Plan repayments
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