The Difference Between Good Debts and Bad Debts

Not all debts are created equal. There is good debt and bad debt. Let’s take a good look on the difference between a good debt and bad debt.

A Good debt is a debt that is based on assets. These assets are usually earning income for you at a rate greater than the cost on the debt. Example of Good debt is Hurdle Rate. A hurdle rate refers to the cost of capital. Say for example, your hurdle rate is 15 %, then you will only consider purchases or investments that is more than 15 %.

A debt is considered a good debt if you truly need it but cannot pay for it yet. You must also consider loans that you can only afford to pay every month.

Bad Debt on the other hand is a debt that does not create an income greater than the interest of the debt. If you’ve taken things that are not necessary and cannot afford, then it can also be considered as bad debt. Mostly, these purchases are not producing income that is greater than the interest, or worst don’t produce return at all. You will know it’s a bad debt if it doesn’t help your business to grow.

Your business financing solely depends on how well you can determine between a good debt and a bad debt. Avoid bad debt and embrace good debt, this will surely give you a springboard to reach the next level of success for your business.