Differences between Smart Debt and Bad Debt

​Borrowing money helps you buy essential things such as a home or a car. Using credit cards helps you earn points, cash-back, or airline points.  However, if not careful, you may end up with something known as 'broke' debt or 'bad debt.'  

If you plan to get a loan, you can learn to differentiate between smart debt and broke debt. While the two are easy to distinguish, some debts are hard to judge, since you should learn how the interest rate is calculated, if it stays the same, if the interest is deductible and many other features that tons of loan products can offer you in the USA. 

​What is Smart Debt?
Smart debt is a loan (or line) that you pay according to the set agreement. This is the type of loan you take to finance something that will hopefully increase in value and one that will contribute to your overall life's productivity.

See more examples of loans that I'd consider good debt.

• Mortgage: This is borrowing money from a financial institution to pay for your home. This is an intelligent loan since your house will be worth more by completing the mortgage payment. A house doesn't depreciate, so you can sell it for a profit a few years later once you have repaid the loan. Besides, once you become a homeowner, you have access to various tax assortment breaks, which renters cannot enjoy. 
• Non-excessive student loans: Getting a student loan can be an excellent example of good debt. Note that some students' loans have a lower interest than other loans. Besides, the interest paid on these loans is tax-deductible. Financing your education can lead to career opportunities that can increase your income.  When I was fresh out of college, I was even able to go years without making repayments, which was especially helpful when trying to finance my first company, Holmes Real Estate Group.  I needed to be saving for down payments, and now worrying about cash flow, which is exactly what Nelnet helped with, thankfully. 
• Business loan: A loan you get to start a business can be good debt. Nothing beats being self-employed. It is psychologically and financially rewarding. However, it is not an easy walk; it has risks, just like any other loan. Many ventures have challenges, but chances of doing well are greater than those of failing. All you need is to choose an industry that you are knowledgeable and passionate about.   These loans are actually hard to get from my experience in the 2010s, and you might have to personally guarantee it, which is scary since most businesses fail. 

Taking too much smart debt may not be the best decision although it helps you acquire something useful, learn more.

What is Bad or Broke Debt?
Bad debt is the loan you borrow and use to overpay for a depreciating asset that has a high interest rate and is not deductible. This type of investment will not go up in value or generate any income. It is also a bad debt if it is a loan that you will strain to pay.

Here are examples of loans that fall under broke debt.

• Credit cards: Generally, cards with high-interest rates can strain your finances. If you cannot complete the credit card payment in full each month, the interest rate will prolong the debt.  However, there are ways to use credit cards smart, but that often involves a time investment for research, outstanding credit, and a close eye on your balances. 
• Cars: A loan to buy a car can also be a lousy debt. The high rate of depreciation of vehicles doesn't help and often can lead to you being 'upside down' on your payment. If you have to take a car loan, get a low-interest rate and make sure you have a stable income.   It is true that some new cars have a 0% interest rate and some benefits, but make sure you get the care below MSRP, in fact, even below invoice. Here's how I helped a friend buy a Mazda Miata below invoice.  She took on smart debt, although cars are depreciating assets:

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Also, here's some tips I have on buying a used car, with many haters in the comments (enjoy):

Spotting bad debt isn't that difficult, sometimes its good debts gone awry, learn more.

Manage Your Debt
The effective way to get out of loans is by managing your debts. Managing your debts is one of the ways to lessen the intense financial stress you might be experiencing. Debtconsolidation.com experts is the most reliable way to manage your debts. These experts will look into your finances and debt and guide you on the best way to manage your funds. For more on debt consolidation experts and what they can offer, please visit their website.