Understanding Good and Bad Forms of Debt

When it comes to the world of debt, there are both pros and cons to consider in what’s known as a complex field. Certain forms of debt are considered necessary and even outright positive as we move through our financial lives, but others are much less prudent and may even lead to situations where your finances are compromised over the long-term.

At 1st Choice Money Center, we’re here to help with a variety of debt-related areas, where it’s a title loan to help you pay down an emergency debt or any other similar need. While we’re happy to assist any client in need, no matter your prior debt types or other financial considerations, we also provide regular expertise and assistance to clients on the right “kinds” of debt to carry, plus how to manage each of them. Here’s a primer on both “good” and “bad” debt, what qualifies in each bin, and how to maximize your use of the former while limiting your reliance on the latter.

good bad forms debt

“Good” Forms of Debt

When we talk about good debt, we’re referring to loans or other debts that help you move toward long-term goals. A home loan, for example, is one of the best forms of debt, because it helps you build equity in a home that can be sold later on.

While it’s true that you pay interest on a home loan in exchange for a lender loaning you money, the value of your home will often increase at such a fast pace that you’ll quickly outpace your interest payments. It’s more of a long-term investment than anything else, which means you may not even need to pay the loan down if it starts to seem superfluous.

Personal loans are another example of good forms of debt, especially when they’re used for real-life needs like medical emergencies or other unexpected expenses. The interest rates are typically lower than credit cards, which makes it easier to pay back the debt over time without incurring too much stress.

Credit cards are another excellent option if you’re able to stick to a budget and pay back the total amount owed each month. They also have certain protections that can help you avoid fees or other penalties.

“Bad” Forms of Debt

On the other hand, bad debt is any type that doesn’t help you move toward long-term goals. Have you recently taken out a new credit card just to purchase an expensive new item, despite a limited budget and other debt obligations? This would be an example of bad debt because it doesn’t help you achieve a positive goal. In fact, it does the opposite, since you’ll be paying interest on that new purchase for years or even decades to come.

Types of personal loans that fall into this category include payday loans and other cash advances. These can carry extremely high interest rates for very short periods of time, and that’s why we don’t offer them — instead, we only offer quality personal loans that help you achieve goals.

For more on good and bad debt, or to learn about any of our title loans, installment loans or other personal loan options, speak to the staff at 1st Choice Money Center today.