Taking a loan is common these days, it not only helps you in emergencies but also helps to eliminate your temporary cash crunches. But before you borrow, it’s very important to know a few things, of which knowing your exact requirement and analyzing your self for the repayments are the most important ones. 

Some themes situations become unskippable and availing a loan is the only solution. But to avoid turning your debt into bad debt, there are few things which you should know. Being unaware of these things can lead to a big financial mess. So, let’s discuss those ones. 

Knowing the Difference Between Good Debt & Bad Debt

Good debt is also loans but it is mostly a sensible investment for your future or the one which makes your financial status stronger in long term. A good debt never has a negative impact on one’s overall financial position. In general, good debts are the ones for which we have a genuine reason to avail of. 

For example, taking a loan to purchase a home or a car be considered good debt. One of the reasons to call it a good debt is- after the full repayment of the loan amount you will get the ownership of that particular house or car. So, it is worth going. 

Examples of Good Debts:

Bad Debts are the one which is not worth its value and mostly drains your money. Bad debts can also be defined on the basis of ‘the loans that have no real prospect to go for. The interest rates are also high which results in high EMIs.

Example of Bad Debts:

  • Borrowing money to go for an unaffordable trip.
  • Taking a personal loan just for shopping.
  • using your credit card for shopping and purchases which are not necessary.   

Why it is important to avoid Bad Debt?

The interest rate for unsecured personal loan and credit cards are unconditionally high. Hence, it is important to prevent these loans from turning into bad debt. To avoid such condition one should think and analyze a few things before applying for the loan:

  • Is the availing of loan really important? Are there no other options?
  • Compare the interest rate for the loan which you are looking for with all the lenders.
  • Analyze your repayment capacity before you apply for any loan amount.

Understand and Analyse the loan before you go for it!

Not all loans are bad debt, as said above some debts are worth going for as in the end, you get the value in return for which you paid. 

If the loan which you are planning to avail, cannot be justified in terms of requirement, purpose, interest, and repayments, such loans are always a bad loan. A very good example of bad debt would be to take a loan of 4-year tenure for buying a flagship smartphone that would become outdated within 2-3 years of its launch. Nothing about this loan is justified, except that it is a wastage of money.

Even a personal loan of high-interest rates for a medical purpose is justified as money can never be bigger than somebody’s life or health. And no one would mind bearing the burden of a personal loan in exchange for the life or health of a dear one.

What to do if You are already Trapped in Bad Debt

If you are already trapped in bad debt and if it’s difficult to repay the loan or even you are facing difficulty in paying the EMIs there are few steps which you can take to get out of it-

  1. Go for Refinance or a Debt Consolidation Loan

If you have multiple loans on you and you find it difficult to repay the EMIs then you should go for a refinance. 

Refinance or debt consolidation is nothing but taking a new loan with a low-interest rate either from the same or even from different banks to pay off the outstanding amount of your previous loan. In this way, you will end up with a high-interest loan and you have to pay less EMI for your new loan.

  1. Talk to Your Lender

If you are not able to pay the EMI of any particular loan because you can’t afford that in that case, you can talk to your lender. You can ask your lender to reduce the EIMs and increase the tenure period. If you do so you will be able to repay the loan efficiently, this will cost you more as by increasing the tenure and reducing the EMI you will be paying more on the interest. But this is a better option against not paying the EMIs and continuously paying penalties as this affects your CIBIL Report and legal actions can also be taken against you.

  1. Ask Your Lender for Settlement:

This is considered the best option when you are in a debt trap and are unable to repay. For this, you need to talk to your lenders and make them agree for accepting an amount less than the total outstanding amount including principal and interest but more than the principal amount. If the bank agrees to this you can pay it off easily and get relaxed from this burden.

It’s always important to analyze things and think twice before you decide to take a loan. Remember borrowing money is always joyful but the real trouble starts once you start paying the EMIs.

Understanding Good Debt and Bad Debt
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Understanding Good Debt and Bad Debt
Read onto this Finance Buddha blog, to understand the Difference Between Good Debt & Bad Debt. It’s important to think before you take a loan.
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Finance Buddha
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