Bad Debt versus Good Debt
ITIPress.org -Marlon Jerez / Consultant in Economics and Financial
Translated by Economic Adviser Soraya Nasrallah
Why do we ask for borrowed money? Usually it is because we do not count
enough on the money that we have in order to buy what we need or want –
like a education. If one person needs to finance four years of education,
that person will need to invest between $30M US to $80M US dollars or more
depending on the university that is selected. Not many people are able to
pay up front that type of money. In turn most people need to indebt
themselves in order to pay for all the costs that accompany the higher
education that they desire.
Which is your opinion based on the purchase of a new vehicle? A sharp
salesman shows us the car we have always dreamed of and they tell us how
we should end the dream and make it a reality! This of course will cost
$20M US or much more. Even though some people do have enough money to fund
their desired higher education or purchase a new car; what happens if I
don’t even have enough money to purchase a vehicle? Should I get financing
to obtain it the same way that I would get financing for my higher
Never should I forget that car salesmen and loaners would try their best
in every which way to convince me to get financing for the purchase of the
car. According to them I deserve it and I should give myself the pleasure
of driving a fancy and expensive car!
Hold on! No! No! No! I should not do this…but why?
Why do so many people sustain that one should not pay attention to car
salesmen or credit card companies? Because there is a difference in
obtaining a loan for a long-term investment purpose that will bring about
rental income or some sort of benefit then indebt yourself due to the
purchase of consumption items that may or may not be necessary.
Let say you spend $2M US dollars in a vacation; the money was used for you
to enjoy yourself. At least it brings about meaningful memories and some
“Kodak Moments” to show; but in no shape or form will it bring you
financial advantages. But you will say, “taking a vacation eases my hart
and mind and once I return I become more productive”. In reality,
vacations are worth more than what they cost.
Well, with this I am not trying to say that you should not take a
vacation; this means that you can take a vacation several times per year
as long as you can pay for it. But the point is; what are you able to
afford and pay? If you need to finance your vacation, then you are not in
conditions to have the luxury of taking a vacation.
What is being said here is that to take in debt for consumption is Bad
Debt. This does not mean that you are a bad person because you carry bad
debt; but this type of debt will subject you to long-term financial
You may be able to take mare vacations in your lifetime if you save the
cash to pay for them. If you have the habit of placing yourself into debt
in order to go on vacation, purchase a vehicle, clothing or other consumer
goods, you will spend all your future earnings because of the payments you
must make toward principal and interests. In the meantime you will have
less disposable money for vacations and other goals that you may want to
One of the reasons why you will have less money when you are the owner of
bad debt is because the interest rates of these particular debts are much
higher than average. Financing through the use of credit cards, automobile
financing and other consumer loans carry with them high interest rates and
are not tax-deductible.
I am not saying that you should never take in a loan and that all debt is
bad debt since there does exist good debt; which is one used to purchase
real estate and open a small business. These good debts usually have lower
interest rates and their interest payments are usually tax-deductible. If
the money is managed intelligently, your investments will bring you
returns in the future. To get into debt in order to pay for an education
makes sense, since that education will become a great benefit in the long
run when they start generating higher amounts of money due to the
advantage they have of being educated.
Send your questions to
"Most misfortunes are the results of misused time." – Napoleon Hill