Good debts and bad debts: How to distinguish and manage them intelligently? money explains

The debts They are a financial reality that we face in our daily lives, but did you know that not all debts are the same? In the world of finance, there is a crucial distinction between “good debts” and the “bad debts“. Find out how to identify and manage them intelligently to ensure your long-term financial well-being.

“Not all borrowing is bad as long as you know how to direct that financing to an investment that will generate more monetary resources than the ones you already generate, so it works as a financial leverage”, explains Wilder Mendoza, commercial engineer and professor at the Domingo Savio Private University (UPDS). .

These are the main differences between a good debt and a bad debt. Take them into account.

Achieve a greater flow of money: All debt generates a financial cost (interest) so if that debt is channeled to an investment (purchase of goods or making investments) that will generate a greater flow of money and that it exceeds that financial cost, it is considered as a good debt, therefore all good debt will be channeled to the purchase of goods and/or investments that generate a return that exceeds the financial cost.

Mortgage credit: This type of financing will be good as long as your projected flows can meet the scheduled payments resulting from that loan, and at the end of the debt payment that asset, that home, will be revalued. Remember that goods such as land as time goes by their value increases.

Vehicle loans: It will be considered a good debt as long as the purchase of that vehicle is for work and/or a collector’s vehicle (a collector’s vehicle acquires greater value as time goes by). If you buy a vehicle for work, it is to generate a greater flow of money than you currently have.

Student Loans: These types of loans are intended to finance higher education studies or technical training; as long as your scheduled payments on that debt can be covered by your projected future income.

Mendoza specifies that a debt good increases the flow of money and therefore profitability is assured, it works as financial leverage as long as your purchases are destined for goods that are revalued or generate more money and allows access to financing sources with referential interest rates.

Higher financial cost: A debt is considered bad when it does not generate more money and causes a decrease in your money flows, “so instead of benefits, they generate higher costs,” Mendoza insists.

Credit cards: The purchases with credit cards are considered bad debts because they generate a higher financial cost than any other type of financing as they are credits that limit you to making minimum payments on your debt, since the financial cost in some cases even triples.

Payday loans: They are loans with third parties where the payments are daily and the financial costs (interest rate) are the highest compared to any other type of financing, we recommend you avoid this type of loan.

For Mendoza, the bad debts do not offer no financial returnsthey limit your financial freedom, it is aimed at buying liabilities that do not generate money for you, it induces over-indebtedness and they are directed at unnecessary expenses.

These are some recommendations What to keep in mind when borrowing:

1. Hierarchize your consumption needs.

2. Prepare a budget that allows you to efficiently manage your money (clearly determine your income and expenses).

3. Invest in training, this will allow you to learn more, apply tools and techniques to efficiently manage your resources and make better decisions.

4. Find out about the types of credits, guarantees and financial costs of the same.

“Don’t forget that he money call money, as long as you channel it to generate higher flows and with that you generate greater profitability” recalls Mendoza.