Grade 6 Lesson 5: Types of #Debt
A while ago, we studied the topic of debt – what it means, its significance, etc. See short-lesson here: https://ayu.technology/lessons/l1e6.html
Today we will learn about the different types of debt. Debt is often broken down into two buckets: “Bad” debt and “Good” debt
#Gooddebt
Typically, a financially smart individual would not want to take on debt. However, in some instances, taking on a debt today could help build a better tomorrow. Debt taken to build a better tomorrow is called good debt. E.g., taking a #loan to study i.e. a #studentloan. Such a debt helps you get an education and thereby could secure you a higher salary down the line. Student loans also generally come with lower #interest rates. Couple this lower cost of borrowing with the likelihood of higher income potential later on, and a student loan starts to look like a good debt. #Mortgage debt can also fall into the category of good debt. If you borrow to buy a home or other property that has a good chance of rising in value, you might be able to sell it for a profit one day.
#Baddebt
Bad debt is typically any debt that becomes tough to repay and/or doesn’t add value to your future. E.g., #creditcard debt. Buying clothes unnecessarily, taking an expensive vacation, buying streaming services or electronics, and charging all of this to your credit card are examples of bad debt, especially if you know you can't afford it.
The distinction between good and bad debt is not black and white and oftentimes, the context is very important.
As we learn about the different types of debt, it is important to understand “Revolving” and “Non-Revolving” debt, and their differences.
#Revolvingdebt
Also called open-ended debt, revolving debt is pretty much just revolving credit. In most instances, it comes in the form of credit cards. Like a revolving door, this type of credit is available to you again as soon as you pay it off. For example, you have a credit card with a $1,000 limit. One month you max out the card. The next month, you pay off $500. Now that you’ve paid some of the debt down, there is $500 in credit available to you again. But be wary—interest charges on any unpaid balance could build up quickly.
#Nonrevolvingdebt
Also called closed-ended or #installment debt, non-revolving debt has a fixed dollar amount that you have to repay regularly (a.k.a. in #installments). You can’t use this type of loan to buy more once you’ve started paying it down like you can with open-ended debt. For example, a mortgage is considered an installment debt because the lender expects a specific amount of #money each week or month and the initial sum of money you asked for is all you’ll get during your predetermined loan period.
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