Non-consumer loans are classified as good debt and consumer loans are considered to be bad debt. Basically, non-consumer loans fall into the category of offering low interest rates, collateral that will likely increase in value and tax advantages.
Consumer loans are viewed as bad debt because of their high interest rates, no collateral that can be used to secure a loan and no tax advantages. You should know the difference in these two types of debts before attempting to secure a loan and be able to determine which is to your best advantage.
A lender will look closely at your credit card debt and see if you either pay balances every month or pay a minimum payment that incurs high interest charges. Credit cards also offer no advantages such as tax advantages and you’re only required to pay a small percentage of your balance to keep using your card.
Credit cards can become an Achilles’ heel fast and cause you to mire deeper and deeper into debt. Having the ability to spend without paying for something right away is tempting, but can cause each and every item you purchase with a credit card to cost infinitely more than the sticker cost.
It’s almost impossible to live completely debt free. Few people have the money on hand to pay entirely for such purchases as a car, home or private education. That’s why it’s so important that you know the difference between good and bad debt and apply for loans accordingly.
Good debts should be considered an investment that will likely appreciate in value or provide income. Although student loans have gotten a bad rap, they’re considered good debts because a college education boosts your chances of raising your future income.
Another way to think of consumer debt is that it’s held by individuals rather than the government. Household debt is also considered consumer debt and statistically the debt service ratio (DSR) that calculates each household’s debt compared to the total income of the household.
DSR doesn’t include rent or mortgage payments. These payments are calculated with a financial obligations ratio (FOR). Today, most homeowners spend up to 20% of their household income on the mortgage payment.
It’s important to know exactly how much your bad debt totals and pay off these debts as soon as possible. The best way to do that is to formulate a budget and curb your spending habits until you save enough cash to pay off the bad debts.
Your budget should include how much you intend to spend for food, mortgage (or rental) payments and clothing, savings and entertainment. Adhering to a well-thought-out budget plan will help you lower your overall debt.