Determining A Good Debt From A Bad Debt
In our previous article, we have talked about facing your debt problems and several of the debt relief alternatives for Canadians. Besides, knowing Canadians appetite for debt, it also necessary to determine whether a debt is good or bad. In this guide, you will know what is good debt and bad debt and the examples of each.
What is Good Debt?
To some people, debt is good if it can be utilized to grow assets and may allow you to boost your income over time. Some people also considered debt as a good debt if it’s deductible in terms of tax. In Canada, this will eliminate the mortgage interest unless when considering a Smith Manoeuvre, which is a loop-hole in the tax law in Canada that aids in writing off your mortgage interest on your primary residence
Examples of Good Debt
The following are examples of good debt. Understanding each can help you understand why it’s considered as a good debt.
MORTGAGE – Unfortunately, your residence is not included in this perspective. This refers to a mortgage on a property that is put into a rental. Considering that the money you owe is in a form of investment, the interest is then tax-deductible. In this manner, you’ll be acquiring a rental income and will be keeping a valuable asset that grows over time, which makes it good debt.
STUDENT LOANS – You might be thinking are student loans a good debt? The fact is investing for your future is generally viewed as good debt. Besides, if your options rely on getting a degree for a well-compensated job over crappy jobs that do not pay sufficiently, getting this kind of debt is somehow justifiable.
In contrast, this might be your only option. Besides, thinking how to earn money as a teenager is a limitless chance and all you need is to think outside the box. Moreover, getting a degree does not equate to your immense success. In fact, several of those who graduated were also having a hard time getting a job, while some of those who haven’t go into college and university were able to attain success in life. Thus, the benefits that you can enjoy in getting this loan might vary in certain situations.
INVESTMENT LOAN – If your purpose of borrowing is to invest, the interest that you’re paying is deductible to your tax. So whatever form of invest you consider, may it be in a business, or stocks, it is technically termed as good debt.
What is Bad Debt?
While good debt is termed to potentially grow your income or represent an asset appreciation, bad debt, on the contrary, are credits or loans taken to purchase or do things, which are not income-generating and does not yield any tax advantages.
Examples of Bad Debt
Here are the common debts that are considered as a bad debt:
CREDIT CARDS – Buying the latest model of iPhone to accumulate rewards using your credit card is not counted as good debt. Staying behind in one or two generations isn’t bad. In fact, most people can live without the latest model of technology. The point is, if it’s not essential but just merely your want, getting into debt to fulfill your desire is not a good idea.
Also, you must ponder if your credit card points are true rewards or they’re just costing you. Moreover, the interest you pay in your credit is not deductible to your tax. Besides, whatever purchases made through your credit card will lower your net worth, making it a bad debt.
LINES OF CREDIT – Lines of credit are comparable to your credit cards. Though it may entail a more positive aspect as it’s customarily attributed as a form of financing. Taking into perspective the fact of using the money that you don’t have, conveys a bad debt.
CAR LOANS – Regardless of whether you’ve justify that getting a new car is essential, the fact that cars depreciate in value makes it a liability. This makes it bad debt as you are to spend money in maintenance or repair without any relative increase on your income.
MORTGAGE – Your mortgage on your own home is not a good debt. This is somehow controversial and several put out a contention that you ought to reside in someplace to vindicate the argument. The truth is, though your house is termed as an appreciating asset, the fact that your mortgage interest is non-deductible, it is perceived as a bad debt.
Your Viewpoints
A few people consider that any types of debt carry a unique purpose. A purpose that aids in attaining your goals when used wisely. However, there are some people who avoid getting into any form of debt. If you’re someone in balance, the information learned might be helpful for you to determine which debt is feasible for your goals.
Finally, constantly assert your assumptions with accurate facts before taking a huge step. If you’re someone who always finds reasons in getting into all sorts of debt, start weighing your situation and get rid of what’s ripping you.
