We all want debt-free living, do not want to be in any kind of debt. But there are times when we have to get plunged into debts like to reach a higher goal, for inventory purpose, for business purpose, wanted to start a business, and so on. In the real-life world, the process of owing and borrowing goes on. While taking a loan, we all must be aware of the good loans and bad loans for our future well-being. Follow the below given 5 things to make yourself aware about good debt and bad debt:
- Debt for Specific Reason
We can manage finances with the help of debts. like consolidation, debt is considered as good debt, because you can pay your multiple debts by taking consolidation debt. But if your business is in trouble, planning to take a loan, rarely it will solve your problem. Therefore, before taking a loan, you have to think about the purpose for which you are taking debt will be helpful.
- Good Debt Increase Your Net Worth
Yes, it's true good debt increase your net worth. Like student loan is good debt that helps to get a new good job, Inventory loan for business purpose is good debt, Home Renovation debt is good debt and increases the value of your house, hiring additional employees is good debt and purchase more supplies is considered as good debt. But make sure that you are taking it for a good purpose.
- Never take a loan for a thing whose value depreciates
Do not take a loan for things whose value depreciates over time. The car loan is one of the right examples of bad debts. Car value decreases to 20% within the1 year of purchase. Therefore, don't take any loan that Doesn't lead you with more money to earn and is likely to depreciate over time.
- Do not provide service for free
If you are running a business, and offering products and services, then don't understand yourself as a lender. Do not produce a product or offer service without receiving payment. If you do so then you are lending money to them. Unpaid debt is considered bad debt. According to industry statistics, there is a 27% chance of non-payment if your invoice is not paid for 90 days. Keep in touch with your clients and make yourself aware of the kind of those clients who have bad intentions of not making payment.
- Avoid taking high-interest debt
Debts that carry a higher interest rate are considered bad debt. Do not take high-interest rate loans. If you are in bad need of taking a loan then do some research on finance companies that offer loans at lower interest rates. Do not get stuck with only one company, make some research before taking a loan from anywhere. The very important thing, check your credit score on a timely basis. Avoid late payments of debt because it affects your credit score and maybe you'll not be able to take a loan in the future.
As I have discussed 5 points which described clearly which one is good debt and bad debt. Hopefully, it will make you decide which one you should borrow.
If you have bad debts and unpaid invoices then please contact us, We are here to assist you!