Examples of Good and Bad Loans

Loans are an essential part of life, considering that we need them for things like houses or business investments. How we handle our loans and our credit history is how lenders determine the amounts and terms they will lend to us again in the future. Having said that, there are many Americans who find themselves with bad loans that are digging further and further into a financial hole and are finding it difficult to dig themselves out. This is why it is important to understand what is deemed as good debt and bad debt, and how to ensure that you don’t fall victim to a bad loan. 

Good debt adds value to your life, such as through education or investments. The goal of a good loan is to make a return on investment and utilize it as a wealth-building tool through generating income. These may include student loans, small business expenses, and real-estate investments. All of these types of loans may provide some form of a return down the road and allow you to not only pay off the loan but continue to profit once it is all said and done. For younger individuals, student loans are among the primary forms of debt taken on. Student loans are a problem for a lot of us, but if the right major is chosen and the individual makes payments as soon as possible, the debt is manageable and can be eradicated in a short time frame. For those within their mid-to-late 20s/early 30s, purchasing real estate may be the next step, which can easily be a great investment to profit from down the road once deciding to sell or rent. 

If you can’t make money from it or cannot afford it outright, this would be considered bad debt. This includes credit card debt, auto loans, payday loans, and personal loans. These loans will almost always come with high-interest rates that make payments almost impossible to get out from under, which is why it is important to avoid them or pay them off as soon as possible.