What Is Good Debt vs. Bad Debt?

Most people don’t understand the difference between good debt and bad debt. In fact, the view of debt as a whole tends to be very dichotomous, with those on one end believing that debt is universally bad, while others treat it cavalierly. But there is a difference between the two and it’s important to understand that. Bad debt is any monetary obligation that is costing you additional money through fees, overdue charges, or interest.

On the other hand, good debt is debt weaponized to manage and minimize the expenses associated with bad debt. An example would be a loan helping you get rid of your bad debt. Understanding the difference between the two is important, and it’s important to have a balanced perspective on debt to help tackle your expenses more effectively. In this article, we’ll dive into good debt and bad debt to help you better grasp the concepts.

Learn The Major Differences Between Good And Bad Debt

What Is Bad Debt?

First, let’s talk about the more obvious form of debt. Bad debt, as you might imagine, is any kind of debt that negatively impacts your finances. That includes any bills that are overdue, affect your savings, or are continuing to rack up interest payments. Some bad debts are inevitable; for example, you might still be paying off student loan debt that affects your ability to pay rent each month.

In a broad sense, bad debt is easily to recognize because it’s always at the back of your mind. High-interest bad debt is especially toxic because falling behind leads to more and more costly rollovers that get progressively more difficult to manage. And possibly the worst part of bad debt is the major negative impact it has on your credit score. Enough unpaid bad debt and your credit will plummet.

What Is Good Debt?

Good debt is the antithesis to bad debt, in that it can help your finances in the long run. Of course, it’s all in how you use it, since good debt can become bad debt if you’re not careful. Good debt includes things like personal loans that you use to quickly knock out your other debts or unforeseen expenses that you need to handle right away, thereby reducing your overall cost and protecting your credit.

You might naturally consider the interest payments and monthly payments associated with the ‘good debt,’ which is fair enough. In the majority of cases, however, the expense incurred by your good debt will be vastly outweighed by the money you save wiping out your bad debt quickly. And when it comes to handling debt, two of the most effective ways to weaponize good debt are the avalanche and snowball methods.

The Avalanche Method

The first way to handle your debt is the avalanche method. The avalanche method starts by allocating as much as possible towards your largest or your highest-interest debts first, while still paying the minimums on your smaller debts. Once those have been cleared, you’ll generally find you have much more money to send towards your smaller debts, creating an ‘avalanche’ from top to bottom until you’re debt-free.

The Snowball Method

The next option you have is the snowball method, which starts off small and builds up over time. Unlike the avalanche method, with the snowball method, you’ll begin with your smallest debt (or smaller high interest ones) and wipe them out as quickly as possible, dedicating as much as possible towards them, while still paying the minimum on your higher debts. When you do, you’ll continually be able to wipe out small debts quickly and build up to the bigger ones more effectively.

How Do I Handle Unforeseen Expenses?

Now that you know the difference between good and bad debts, you should know how to handle your emergency expenses that can make your bad debts even worse. We at Wisconsin Auto Title Loans, Inc. are here to help if you need an installment loan to handle things like medical bills, emergency home repairs, emergency car repair, or urgent travel. You can obtain as much as $1,500 towards your loan, and all you’ll need to find out if you qualify are the following:

• Your driver’s license or valid state-issued photo ID.
• A checking account statement open in your name.
• Proof of income via your most recent pay stub.

The process for an in-person installment loan is as brief as 30 minutes, and if you get approved, you can receive your money that same day or next business day. To get started, contact a store location directly by phone or complete the online inquiry form for a quick call back. Answer the phone when a representative calls you back to confirm your information. They’ll also ask if there are any questions you have about the loan process.

They will then set up an appointment for you to come into the nearest installment loan store in Wisconsin so we can assess your items. When you arrive at the store, an associate will review your important items and assess the amount of cash we can lend you if you get approved. Once done, they’ll go through the paperwork with you. If you’re approved, you can start using the money for your emergency expenses as soon as that day or the next bank business day.

Learn About Your Debt To Vanish Your Fears

Now that you understand the difference between good debt and bad debt, you no longer have to be afraid of debt. Take a good look at your debt and separate them from good and bad. Once you do that, you’ll have an idea of how best to take care of the bad debt and how to keep your good debt from turning bad. And if you run into an emergency, remember you can fill out the online form to get started on our simple process for an installment loan.

 

Note: The content provided in this article is only for informational purposes, and you should contact your financial advisor about your specific financial situation.