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Prime Property

Prime Property

Date: 2016-05-20
Get Clued Up: What You Need to Know About Debt

A large percentage of theSouth Africanpopulation is currently in debt and what is not always fully understood is that debt is not just debt; there are in fact different types of debt.

The two types of debt that you may find yourself in are: good debt, and bad debt.

It is exceptionally important to be able to identify what kind of debt you are getting yourself into when you are purchasing on credit, getting a loan, or planning monthly repayments, as the two different types of debt each have their own benefits or downfalls.

Good debt versus bad debt

Let's take a look at the different types of debts and examples of each:

Bad debtis generally a negative form of debt as it is detrimental to your long-term wealth. This is the case due to the nature of the purchased items not generating a long-term income and having a depreciating value.

Bad debt is incurred when you continue to purchase non-essential luxury items on your credit card, even though you are already struggling to make your monthly repayments. Examples of non-essential luxury items may include extravagant buys on smart TVs, gaming consoles, and even taking out pay day cash loans.

The general rule to avoid bad debt is: "If you can't afford it, and you don't need it. Don't buy it."

Now that you have a better understanding of bad debt, let's take a look at good debt:

Good debtis seen as a positive form of debt as it will be beneficial to your long-term wealth. This is the case due to the items acquired through good debt possessing an appreciating nature, and the potential to deliver a long-term income.Examples of good debt include student loans, vehicle finance loans and mortgage loans.

A mortgage loan is an example of good debt because they generally have low interest rates (depending on the risk rating of the customer). The nice thing about being a homeowner is that you do not have to rent and pay off someone else's bond in the process. You now have your own home where you can raise your family.