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Added: November 14, 2008
http://personalmoneystore.com/moneyblog/2008/10/23/examining-payday-loans-vrs-good-and-bad-debt/ Borrowing money and incurring debt is a process that all Americans do today, even though most frown upon it. From auto loans to credit loans to payday loans to various other types of personal loans, there seems to be a loan frenzy today that is contributing to the average Americans already $8200 of consumer debt. That being said, there has been more fortunes made off of borrowed money then any other way, so dont think borrowing money is bad because it is vital to your financial success.
The key here is what you are borrowing the money for. In this article I will help you to understand the good and the bad of borrowing. There is good debt and bad debt. Be sure to understand the differences between the two.
Bad Debt is debt that is accrued that has no potential equitable value or investment return.
What I mean by this is that you will never see a return on the money borrowed. An example of bad debt is consumer store credit cards. What ever you charge on those cards will only depreciate overtime, plus you have the revolving credit balance that further taps you r wallet with interest charges. Financing a new automobile is another great example of bad debt. The moment a car drives off the dealers lot, it has already depreciated to some degree or anther and will continue to do so as each day goes by. Sometimes autos will depreciate so fast that you end up in a position where you cant sale them for the amount you still owe on them. Bad debt loans will never return a profit to you where Good debt loans will.
Good debt is borrowing money that is going to prove equitable over time.
With good debt you will usually get a profitable return on your money. Perhaps the best example of good debt for anyone to possess is personal home loans and for more reasons than one.
"A home purchase is an example of good debt"
"A home purchase is an example of good debt"
When buying a home an individual may pay $750 on their monthly mortgage payment. A hundred dollars will go towards the principle amount and the other $650 will go to the bank in the form of interest (yes, they are payed well). The advantage here is that the equity or value of the home may be rising at an average of $1000 each month which means that you are in all reality getting paid $250 dollars a month to live there. You wont get to see this profit until you sale the house but none the less, it is a real cash opportunity. I like to think of it as forced savings.
This also opens up widows of opportunity down the road for you to leverage your equity which is the difference between your homes value compared to what you owe left on your mortgage. Lines of credit and other possibilities are more easily established when you have established equity in your home.
In contrast, renting an apartment you may pay $600 a month for rent that you will never see a return on. Renting does nothing for your financial health.
Know matter what the loan is or where the money is coming from, what it is used for is the key factor.
Another great example of this would be a payday loan or cash advance. Most scoff at these types of loans however they are very easy to obtain and can get you out of some real trouble as well. Payday loans are short term, usually no more than 2 weeks and charge you about $15 dollars for every $100 dollars that you borrow. That can sound steep, however if for one reason or another you hit some hard times and need an extra $100 to pay your mortgage to avoid a $75 late fee, you will save yourself $60 in fees by borrowing a short term payday loan. You will also potentially save a bad mark on your credit report.
Conclusion:
The smart use of money will save you thousands of dollars and make you many thousands more. I hope this helped you understand the differenced between good debt and bad debt. There are many more examples I could use but I think youve got the picture.
Author: personalmoneystore
Keywords: woman man payday loan debt financial home auto equitable investment
Added: November 12, 2008
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