It is almost impossible to avoid taking out loans during your lifetime. Therefore, it is very beneficial to know the difference between good and bad debt. Here are seven types of loans that you are most likely to run into. By avoiding bad debt and taking on good debt when necessary, one will use money effectively to accumulate wealth. If one has taken on too much bad debt in their life, Hornet Partners can help you with a debt consolidation plan that can bring you back to financial security.
School loans are typically seen as good debt. When you graduate from college, your earning potential will be increased for the rest of your life. A college education can help you find a job, receive a higher salary and help you to obtain a better quality of life. A debt must bring more wealth into your life for it to be considered good. So if you major in biology and are planning to go to medical school, your undergraduate loans can be considered good. If you major in a field with a less than stellar salary, or one which will not reward your investment in your education, your debt can be considered bad. With the advent of the plethora of government loans, it is almost always possible to go back to school to study for a job in a high-paying field.
Small Business Loans
Since you need money to open a business, small business loans can be considered good. No one opens a business if they expect it will lose money, so your debt may be assumed to bring in money in the future. A solid business plan is crucial for the success of a startup. One should try to get the most accurate information and work zealously to achieve necessary goals. If your business crashes, you will be left with bad debt. Taking out these types of loans can be risky, but the reward can justify the risk in some cases.
Taking out a mortgage can be a necessity since you need a place to live. While you can rent a place to live in for the rest of your life, never having to pay rent after a certain period of time will save you money in the long run. Additionally, a home’s value will increase with time to bring more wealth to you. The key to a successful mortgage is to take out a loan that you can afford to pay back every month. Your mortgage can also lead you to taking out a home equity loan. While this loan can be risky because you place your home under collateral, a mortgage undeniably brings with it many positive benefits.
These loans are typically seen as bad debt. Although a car might be necessary to go to work, your vehicle will gradually diminish in value. Financial experts agree that the best option for obtaining a car is to purchase a used one with cash. Although you could purchase a new car for reliability, it could still be classified as bad debt since it won’t directly bring with it accumulated wealth. Since a car could be a necessary expense, getting the least expensive one that suits one’s needs may make the most financial sense.
Home Equity Loans
Home equity loans allow you to secure access to money with low interest rates. The catch is that you put your home up as collateral. So, if you take out a home equity loan and fail to repay it on time, you could lose your house. This type of debt can be considered good or bad. If you use the money from the loan to finance an unneeded vacation, it could be classified as bad debt. If you use the loan to install solar panels that will save you hundreds of dollars a year, it can be classified as good. It is risky to put your house up for collateral, but a prudent plan can use a home equity loan to get ahead financially.
Credit Cards/Payday Loans
With high interest rates, these loans would have to be carefully managed in order for them to be considered good debts. Payday loans can carry with them a 400% interest rate. If you can instead open a line of credit and pay it off successfully every month, your credit score will be benefited. In fact, your credit score will suffer if you do not have credit. So, the occasional good use of a credit card can be necessary. As long as your payday loans are used for emergencies and your credit cards for improving your credit score, these debts should not cripple you. Misusing these types of loans can cause havoc in your financial life, however.
In conclusion, good debts help you financially while bad debts do not. Using credit wisely can help you get things in life that you could never have otherwise. Unfortunately, financial mistakes can be made. Debt consolidation companies like Hornet Partners can assist you with trying to repair your financial situation. With a debt consolidation loan, all your debts can be transferred into one account with a single monthly payment. Financial freedom from bad debts can be possible; a simple inquiry can be the first step in repairing the past and setting up a successful financial future.