There are several types of debt that can be accumulated over time, but knowing the difference between good and bad debt will make all the difference. While it may be strange that any debt can ever be deemed “positive,” there are some liabilities that will help your overall financial situation, as long as they are used effectively and you can service them. In this article, we’ll look at the distinctions between good and bad debt, as well as the best approaches to deal with them.

What is “Good Debt”?

So, just what is “good debt”? To put it simply, good debt is any debt that is linked to a wise investment in your future. If it will put your personal finances in a better position in the long run, without a long-term deficit, it is most likely an example of good debt. You must have a clear, precise purpose for taking out the loan, as well as a practical and quantifiable strategy for servicing the debt while it is outstanding. When you take out a mortgage, for example, the creditor will normally devise a plan for repaying it in manageable, regular instalments. Good debt is also defined by the debtor finding the lowest option to pay off the loan.

Some individuals believe that the choice with the lowest interest rate is the most cost-effective. This is not always the case. Many loans with very low interest rates frequently come with heavy financial penalties that can be debilitating if you fail to meet them. Finding the ideal combination of all of these criteria might be difficult, but it will pay off in the long term.

Here are a few instances when taking on debt might be a wise financial option!

Student Loan

A student loan is most likely the most visible and frequent example of positive debt. For starters, graduates often earn significantly more than non-graduates after completing their studies. More importantly, the terms of these specific loans are extremely favourable to the debtor. Student loans have extremely low interest rates, and in many cases none at all. This is the best time to change your mindset around “debt”. At the beginning of your career as a medical professional, this is the time to consider your debt as a tool to generate wealth, rather than a hindrance. To learn more on how to turn your student debt into wealth, contact us here!

Mortgage

Another prominent example of positive debt is a mortgage. The major criteria that distinguishes a mortgage as “good debt” is the value of the home. After you have paid off your mortgage, the property you are left with will be a significant financial asset as it is expected to appreciate in value over time.

Business Loan

If you own a business and take out a loan to invest in it, this is also excellent debt. However, this is dependent on the current status of the firm and how feasible or sensible your business strategy is. If everything goes as planned and your firm grows rapidly, its value will be substantially greater than the debt you initially took out.

What about bad debt? 

As you might expect, bad debts are those obligations that have the potential to drain your wealth, are unaffordable, or do not have any realistic possibilities of “paying for themselves” in the near future. They are frequently distinguished by spur-of-the-moment impulse purchases, as well as weak or unrealistic payment arrangements. Borrowing huge quantities of money to pay for everyday costs such as food and bills is another prominent example of bad debt.

Putting what you’ve learned to work

So, what should your take away be? Debt does not always merit the bad “press” it receives. Debt can work to your advantage if you’re wise and clever with your money. Use these suggestions to enhance your life by owing money in the correct way and for the right reasons. When used effectively, debt may dramatically improve your quality of life!

If you have any questions regarding debt or want to get started on a plan for you to take control of your finances today – contact one of our Medtax.ca specialists to see how they can assist you!

About the Author: Alex Powell

CPA CA, Director

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