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Good Debt vs. Bad Debt

Debt is becoming a bigger and bigger problem here in the U.S. More and more Americans struggle under the financial burdens of debt every year, making it a struggle to get by. Unfortunately, this has led to many misunderstandings about debt, demonizing any debts as a bad thing and making people forced to take on any debts feel guilty. In reality, there are good debts and bad debts, and it’s important to recognize the benefits of good debts—allowing you to better avoid the risks of bad debt.

In general, the difference between good debt and bad debt can be summed up by its relative returns. Good debt is an investment into an asset that appreciates over time, while bad debt continues to lose value, meaning that any interest you pay on the purchase is simply thrown away. Mortgages, real estate investment loans, educational loans, and small business loans are generally considered to be good debt that will increase in value as time goes on, whether due to purchasing actual appreciating assets, such as a home, or through increasing the probability of a greater income potential over time, such as through college loans or the loans to start a small business. Even some credit card consolidation loans can be considered good debts if they decrease the money you will owe on previous debts by reducing the interest rates.

Bad debt, on the other hand, simply increases in cost without any accompanying increases in value. Credit card debt is the most common example of this. A soon as you buy clothes, food, or other consumable items, they immediately decrease in value. By purchasing them on credit, you are simply paying more for them, racking up more bad debt.

Good Debts Offer No Guarantees

Of course, even typically good debts can quickly become bad debts, because there is no guarantee that you will obtain expected returns on investment. As it has been regularly reported in the news lately, educational loans are no longer a guarantee for successful career, and large educational loans can even be a challenge to ever fully pay back. Mortgages can go underwater, leaving you owing more on your house than it is worth. Even businesses with huge potential can fail or go bankrupt.

With any debt, it’s important to assess all the potential risks before taking it on, because there is never a guarantee of profitable returns. Any debt can become a loss with time, so you need to remember that anyone can find themselves in over their heads in debt—even after carefully weighing the pros and cons. Don’t ever forget that all debt is a gamble, even good debt.

Of course, good and bad debt is sometimes necessary. Almost no one can go throughout life without acquiring any debts ever. Even people with the most careful plans to avoid falling into unmanageable levels of debt can sometimes be overwhelmed by the unexpected, such as medical debts. The government recognizes that anyone can be overwhelmed by debt due to unforeseen circumstances, which is why bankruptcy statute was created as an opportunity to get a fresh financial start.

Anyone has the opportunity to clear their debts and start over—the difference between good debt and bad debt doesn’t matter. If you are looking for a way to handle spiraling debts you can no longer manage, call the Ohio bankruptcy attorneys at Cleveland Bankruptcy Attorneys today at (216) 586-6600 to find out how we may be able to help.

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