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GOOD AND BAD DEBTS: HOW TO USE A LOAN FOR YOUR BENEFIT

There are certain good debts, which work in your favor, help you generate wealth in the long term and achieve goals.

In this article you will find everything you need to know about the strategic use of debt, how it helps to borrow money to improve your finances and how bad debts can be avoided.





1. What is a good debt?

Think of good debt as money you borrow to achieve a goal. This type of debt can also help you generate wealth or improve your financial situation in the long term.

A good debt helps you invest in the future. Although you will have to make regular payments every month to pay the loan, it will end up favoring you in the end.

"This does not mean that good debts are free of risk."

As with any financial venture, it is important that you make sure you understand the terms and conditions of a contract before taking out a loan.

Looking for the lowest possible interest rate and negotiating a payment plan that fits your finances can help you reduce risks.

Examples of good debt

With these credits you invest in your future since they give you access to knowledge, skills and training that can improve your future employment opportunities.

Commercial loans help you create, manage or grow your own commercial company.

Depending on your needs, a small business loan can help you increase your cash flow, facilitate the acquisition of new equipment, allow investment in new properties and other strategies to develop the value of your brand.

Mortgage loans help you pay for a new home. These loans tend to be accompanied by relatively low interest rates.

Unlike renting a house, buying one helps you generate long-term capital and even favors you with certain tax benefits. Even if you improve the house, the resale value can rise and your investment will have generated profits.



2. What is a bad debt?

A bad debt is one that harms your finances in the long term.

Bad debts include loans that you can't pay, as well as credit products with unfavorable payment terms or high interest rates.

For example, a bad debt is one used to acquire items that lose value or unimportant things that we don't really need.

#Did you know? According to Experian's 2021 Consumer Credit Study, the average American has debts totaling more than $96,000.


Examples of bad debts

Payday loans may seem useful in theory, but these short-term loans usually have high interest rates and high charges for late payments.

Many consider them predatory since they will increase your debts quickly if you don't make the payments on time.

Car loans can sometimes be valuable, particularly when you need a car to expand your employment options or run your own business.

That said, it is crucial to remember that the value of cars depreciates from the moment you take them out of the dealership, which means that you will not accumulate any wealth for this investment.

Credit cards can become a bad form of debt, depending on how they are used.

Since these cards tend to have high interest rates without an established payment period, outstanding balances can grow quickly.

If you don't pay your personal or business credit cards on a regular basis, they become a bad debt.



3. The debt is good or bad depending on how you use it.

Generally, a debt alone is not good or bad (except for predatory loans), but depends on your financial habits.

In other words, few financial options are completely identifiable on one side or the other, since what works for some, does not for others.

Let's use personal loans as an example.

A house remodeler who uses a personal loan to remodel a property and resell it acquires a "good debt," since he is investing in a project with a clear return on investment.

However, someone who uses a personal loan to finance an extravagant honeymoon (which he can't really pay) may have a "bad debt," since he will end up paying a long time after the trip is over.


4. What should I keep in mind to avoid bad debts?

Generally speaking, avoiding bad debt means doing due diligence before obtaining a credit. The following are some aspects to consider:

  • Don't borrow more than you can afford. This is especially true if you are already in debt. You can't solve the debt you already have by acquiring more debt, with the only exception of debt consolidation.

  • Don't borrow to spend if your discretionary income doesn't cover the cost. If you're applying for a loan for something you don't need, or for something that doesn't help your finances, think twice.

  • Make sure that the debt offers you a good return on investment (ROI). Returning to the debt goal that helps you grow, look for debts that help you achieve your financial goals.

  • Look for the best rates and payment terms. Look for favorable rates and terms, since it is often impossible to modify them after the fact. Similarly, debts with fixed interest rates are usually a better option than variable rates.


5. How can I protect my finances if I have bad debts?

If, unfortunately, you have already obtained a bad debt, don't worry. Getting out of a bad debt is possible to manage your finances and even pay your debts faster if you follow some advice.

First of all, make a plan to start paying your debts by taking advantage of every free dollar you can have. This may mean reducing your personal or business spending habits in the short term.

Strategies to pay off debts

  • "Debt snowball" strategy, which involves paying the smallest debts first.

  • "Debt avalanche" strategy, which involves concentrating on the highest-interest debts first while making minimum payments of other debts.

  • Contact your lender to see if they are willing to offer you a different payment plan.

  • If you need help or additional resources, think about getting advice from a credit professional.

There is no single strategy that is right or wrong, since each one has its advantages and disadvantages. What counts is that you find a tactic that works for you and that you keep it!

Consolidate your current loans

Debt consolidation loans allow you to pool several debts in a single loan, often at a lower interest rate. This can make it easier to organize your monthly payments and prevent you from not paying a bill.

These loans can also offer better options and payment terms.

Although you will still have to pay your current debts in full, you will often save money by doing so, which will allow you to allocate those funds to other needs.


6. Rules you must follow about debts

In terms of your current debts, both good and bad, there are some tactics that are worth using to keep your finances under control.

Start by organizing yourself

If you haven't already, create a list of all the debts you have, from credit cards to student loans and medical bills.

Take note of the minimum payments and interest rates associated with each one.

Don't keep acquiring debts.

Never get new debits without thinking about it and analyzing it.

If you are already worried about your current debts, focus on paying them off before getting new ones. Keep in mind that this could also mean dispensing with the use of your credit cards.

Develop a payment plan

The prioritization of your debts will depend on your personal preferences, but focusing on the Snowball or Avalanche methods is a good idea. Ask if you can set up automatic payments.

Don't just make the minimum payments

Although making minimum payments could save you some money, it also ensures that you will accumulate interest rates and remain indebted for longer.

It's always better to pay a little more to get out of the situation faster.

Lower your interest rates

Although this is not always feasible, you may be able to change your credit card or consolidate your debts so that you receive lower interest rates. This can help you save money in the long term.

Seek help if you need it

If you face difficulties in staying organized or if you are overwhelmed, contact a professional.

Money management is a learned skill, whether for personal or commercial use, and you don't have to be ashamed to admit that you need help.

#Did you know? Any type of debt can become problematic if you do not manage it well and, therefore, it is a good idea to carry out periodic checks of your finances.


7. How to use debts to generate wealth

Since many people associate the term "debt" with something negative, it would seem contradictory to accept that you can use the debt to make money, but you can.

The right strategies allow you to take advantage of good debts to create wealth in the long term.

Buying property

It is worth pointing out that mortgage loans tend to be one of the safest and risk-free ways to generate wealth. These low-interest loans allow you to accumulate personal wealth over time.

If you already own a home and want to invest in a second property, you can finance it through a loan. For those who hope to invest in real estate, this can be a smart option.

Invest in yourself

Education is another way to generate wealth in the long term.

You can take advantage of student, personal or commercial loans to pay for studies and courses.

Although the payment of these loans may take time, proper education will lead you to a better paid job.

Even for business owners, going to academic institutions or returning to classrooms can open the doors to greater opportunities.

In addition, you can use a loan calculator to make sure that you can make the monthly payments.

Invest in your business

If you are an entrepreneur, obtaining a commercial loan is a quick way to grow your business and your wealth. You can use it to:

  • Expand when you get a new location

  • buy new tools

  • promote you online

A commercial loan can help you move forward on your financial path. It is important that before obtaining a loan, you make sure that it will bring you a good financial return.

You can do this with the return on investment (ROI) formula that tells you how much money will help you generate an investment.

ROI = (Total profit - Investment / Investment) x 100

Have a plan and follow it.

Before applying for a loan, make sure you have a plan that describes your objectives and strategies. This will help you to:

  • identify the types of financing that are right for you

  • determine how much you need to borrow

  • show lenders why they should invest in you or your business

But it is just as important to follow this plan once you get the loan.

It is tempting to use the money to make other purchases that were not planned, but it is important that you use the loan money only for the intended purpose.

Create a budget

A quote will help you keep track of how much money goes in and out so you can manage your cash flow more efficiently and ensure that you can pay off the loan on time.

Regularly supervise

It is important to monitor how you are using the funds and make sure that they go where they should go.

Regular monitoring will help you make sure that you are making solid investments and making the most of the capital.

If you are ready to get a commercial loan, turn it into good debt and grow your wealth, we are one of your best options.

At Amerishop Financial Services & Advisors we are ready to help you.

Send a request today HERE


info@amerishopsas.com

800.927.5568

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