You may have heard the phrase good debt, bad debt. It’s based on the idea that some of your debts can actually be good debts. These are debts incurred for items that are expected to appreciate in the years to come. A mortgage is the number one example of good debt because you can live in your house and it will definitely appreciate in value. It can also be argued that an auto loan is good debt if you use it in your job. On the other hand, bad debt is debt incurred for items that won’t last or that will not appreciate in value such as a five day cruise or yet another flat screen TV.
Good loans, bad loans
Just as it can be said that there is such a thing as good debt and bad debt, there are also good loans and bad loans. So how can you know the difference? Maybe this goes without saying, but the first difference between a good and bad loan is the amount of interest charged. Credit cards, which are a kind of loan, often have interest rates of 18% and above. In comparison, you should be able to get a mortgage loan these days at 5% interest or for even less if you were to choose an adjustable rate mortgage (ARM).
Another type of loan that can be a bad loan is an unsecured loan. This is a loan that requires no collateral. In other words, you’re not required to pledge any sort of an asset to secure it. The reason why an unsecured loan can be a bad loan is because, once again, you’ll probably be required to pay a very high interest rate. This is because these loans are riskier for lenders for the obvious reason – there is no asset they could seize should you default.
Signs of a bad loan
There are things you can look for besides a high interest rate that could signify a bad loan. For example, you should stay away from any loans that require money up front or that have changing interest rates. An adjustable-rate mortgage might make for a good mortgage but not for an unsecured loan. You could start at a very low rate but before you know it, see it escalated to 16%, 18% or even more.
You should also stay away from loans that require balloon payments or that have excessive fees. If the lender is trying to convince you to borrow even more money, this could be a red flag and you should pass on the offer. You certainly don’t want to borrow more money than you think you could realistically pay back.
Don’t get any loan involving a credit card that accesses into your home equity or that requires you place some valuable asset as collateral. Also, do not sign up for a loan that has a binding mandatory arbitration clause as it would eliminate your right to sue if you find you’ve been duped. Finally, watch out for high-pressure tactics. If the lender is urging you to sign immediately, don’t. Get everything in writing and then take it to an accountant or lawyer for review. Barring this, you might go to your local consumer credit counseling agency and ask for an opinion.
A good loan
A good loan is one with a reasonable interest rate, good terms and that’s backed by a reputable company. For example, our debt consolidation providers have years of experience helping consumers deal with their debts. We offer a simple 100% satisfaction guarantee so that if you are unhappy with the consolidation plans we offer you, you can simply walk away and pay no fees or penalties. We can most likely save you thousands of dollars and have you debt-free in 24 to 48 months.
Learn more about a good loan. Call us today for more information.