When is a debt good or bad? How to identify them?

Debts are usually seen as something clearly negative, however, There are times when borrowing may be the ideal option to achieve new goals. This must be done carefully so as not to risk your financial, personal and emotional stability.

Thus, it is important to analyze beforehand if a debt is good or bad, indicates the advisor in personal and business finances Alejandro Saracho in a publication of Forbes Mexico.

“The difference is simple, a good debt (which I call expansive), is a debt that allows you to make more money through the debt itself, and a bad debt (or destructive) is the one that creates financial problems Explain.

destructive debts

The specialist states that Destructive debts are those related to a person’s lifestyle, especially when you use money or credit to buy goods or services that lose value over time or lose it completely. A clear example is to get a new car from the agency through financing, because the vehicle loses value since it goes out on the street and will continue to lose it day by day.

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Something similar happens when you buy your vacations in comfortable monthly installments. You buy with a card, you get very happy, the date arrives, you are even happier, you come back, you even forgot and you still have to continue paying the debt. Simply put, after you consumed the good, its value dropped to zero. Nevertheless, you have to keep paying it.

“That is a destructive cycle of wealth, because the more you use the debt for destructive issues, the more you destroy your generation of wealth”, Saracho explains.

The expert clarifies that talking about wealth is not talking about millionaire figures: “There is a term called net wealth that is nothing more than your assets, the things you own minus the things you owe, the result is your net worth. In the end, what we must seek is to possess more things than the things we owe”.

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Expansive debts

After understanding that destructive debt significantly affects your wealth, it is important to understand what it is the expansive debts that, in fact, help you develop it.

Through good or expansive debts What you do is a kind of financial leverage, that is, you manage money as banks do, it is indicated in the article.

3 types of expansive debt

According to the expert, There are three types of expansive debt. These are the cases in which it is convenient to make a loan to grow:

• Business debt: if you are going to buy raw material on credit and when you sell the product you will have a utility to pay the debt and have a profit.
• Investment debt: if you are going to invest money and they lend you at an interest much lower than the return that the investment gives you (assuming that all investments have risk).

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• Debt for education: if you are going to pay for your education on credit, and if with what you are going to learn you are going to generate more money to pay the credit and have an additional profit later. (I)