Bad debt is money that is borrowed to buy items (usually wants and not needs) which loses value over time and which will not provide a commensurate
financial return to pay for the interest on the debt.Good debt is money that is borrowed to buy items which increases in value and/or which provides financial return to pay for the interests on the debt.
Examples of Good Debt VS Bad Debt:
Good Debt :
Money is borrowed at 10% annual interest to pay off a previous debt for which you are paying 20% annual interest.
Bad Debt :
Money is borrowed at 20% annual interest to pay off a previous debt which is charging you 10% annual interest.
Good Debt :
Money is borrowed at 30% annual interest to buy an apartment that will give you a rental income that is equal to 50% annual interest.
Good Debt :
Money is borrowed at 20% annual interest to pay for education/seminars that will increase your human capital value in the corporate world.
Bad Debt : Money is borrowed to buy the "latest" gadgets just to be ahead of the crowd.
From the examples provided above, the essential difference between a Good Debt and a Bad Debt is whether the money borrowed is used to accomplish the following:
I. Generate additional income for You.
II. Reduce your expenses.
III. Increase your value as a professional or human capital.
If the borrowed money does not accomplish any of the 3 items above, then most likely the debt incurred is bad debt.
So pay off bad debts and stay off bad debts.
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