We know that we take loan for different purpose. It may be in form of car loan, Credit Card or Personal Loan. Different rate of interest is charged for different level of loans, depending upon the risk associated with each of them. There are different type of Debts, and it is necessary for one to know in order to manage your loans i.e. what to do with the amount of money you are borrowing. Debt can be hindrance in wealth creation. Thus it is necessary for you to know about Debt Management, so that you can make the debt your slave rather than other way round.
Good Debt arises when you take loan for anything you need but can't afford to pay for up front without wiping out cash reserves or liquidating all your investments. Such debts are tax deductible and are paid in pre-tax dollar. For example if we take loan to buy an investment property or to invest in share. Good debt can help you to maximize your tax position.
Bad Debt on contrary refers to debt you have taken on for things that you don't need and also can't afford. Such debt is also not tax deductible. For example interest payment on your home or interest payment for your personal credit card.
Thus after having idea on Good and Bad Debt we can say that debtors in bad debt fails to make investment and are always in the process of making payments for debts. Borrowing money for proper purpose is the first step for Debt management. So there is difference in borrowing money one to buy consumer goods or depreciating assets and other for investment in appreciating assets. Taking loan for investment will reduce your interest rate and thus will help you to mange your debt.
There are few more steps which you should keep in mind for managing debt or making your making your money work in your favor.
1. Always borrow money or to take loan to purchase appreciating assets and to make investment.
2. If you have taken different type of loans, thus its feasible for you off the bad debt first.
3. All of us know that different interest rates are charged for different type of loans. Thus it is necessary for us to keep proper knowledge of different interest rate and to pay off the higher interest rates first. For example if we have two Good debt one loan for investment in property and is for investment in share then it is good for you to pay off the one with higher interest rate first.
Taking loans is not a big issue but managing debt is a major concern. Thus following the above steps will help to come out from debt and will make your money work for you.
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