Regardless of the adage, “Money is the root of all evil,” money is the essential commodity an individual needs to survive in today’s world. Even when one is a student, there are only a few schools that offer free tuition. Though one is lucky enough to study under that initiative, going to the university still has many hidden costs. After graduation, there comes the pressure of owning a car and a house or condominium. What do you do when it doesn’t seem to be enough?
Debt: Is It Always a Bad Thing?
Even first-world countries such as the United States of America go into debt, but it remains as one of the countries with the most robust economies. When the revenue is no longer sufficient to sustain the need, debt can be the way to go. So is it always a bad thing? The answer is it depends. Let’s look at the different kinds of debt and assess whether one is good or bad debt.
Consumer Debt
Consumer debt is not an asset since it results from buying things for personal or household consumption. This can be categorized into a revolving or debt that needs regular payment and non-revolving debt or that which comes in the form of a lump sum with fixed payment within a particular term. Since consumer debt comes with an interest rate over a period, it can put one into a burden of compounding debt interest if they defaulted in payment. This should be avoided since consumer debt in the hands of an undisciplined individual will always be a bad debt.
Student Loan
This one is a form of consumer debt for individual use and can be the last resort for a student who wants to obtain a degree. It will take a long time to determine whether this type of loan will be a good or a bad debt since it will also depend on whether the student gets to land a high-paying job that can cover his student loan within just a few years. Otherwise, one can find himself constantly allotting a considerable portion of his monthly earnings to just paying off his debt and barely living.
Personal Loan
If one has an idea that can go big once introduced in the market and can also be patented, a personal loan can be an option. This is good debt, primarily if used to finance a venture or an investment that will yield great returns.
Car Loan
The value of a car depreciates, so people have always viewed the car as a bad investment. If one can put up a car rental business or use it to deliver goods, a car loan can also be a good idea since the money that comes in from using the car can cover the car loan costs. However, if the ca is to be used only to fit the lifestyle one aims for and not produce cash flow, then it will be a liability since you would need to pay for maintenance, insurance, gasoline, and others.
Real Estate Debt
Real estate debt can be the best kind of debt since you can generate profit from the loopholes. You can earn from taking out a loan from a mortgage lender. Depending on the laws of the state you are in, you can also be free or have minimal taxes because of it. This is how the upper class makes more money out of a mortgage.
For example, you have a savings of $150,000. That can be a lot, but not when you are purchasing a real estate property. Hence, your course of action can be to get a mortgage. Since you need to pay a 20% down payment, you can get a mortgage worth $750,000. If you find an old house worth $500,000, you can get a mortgage worth $400,000 as you need to pay a 20% down payment.
You allot $50,000 to renovating a house and making it modern and luxurious. You also find tenants who are interested in living in it. When you go back to your bank to refinance it, the property has now appreciated to $700,000 since it is newly renovated and commercialized. Eighty percent of $700,000 is $560,000. From that amount, you can pay the $400,000 for your first loan and deduct the $50,000 for the renovation. You’ve earned a whopping $110,000, plus a money-generating property.
People usually view debt as the pathway to a long-term financial struggle. Hence, one ought to be financially literate before getting himself into any form of debt since it can either put you into a pitfall or warrant a higher rate of return. The bottom line is that debt can be a powerful tool when one knows how to leverage it.