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Understanding Debt🙌

Understanding Debt🙌

Debt is when we borrow money which we need to repay. In some instances you don't need to pay back any interest on your ebt but in most cases you will have to pay back interest.

Interest gives the lender an incentive to lend to you and the amount of interest charged is based on how risky the lender views you.

Interest is not charged the same on all debt, it can be charged daily, weekly, monthly and yearly.

If you fail to keep up on payments with your debt you may find yourself being charged compound interest on your debt as the interest is charged on the outstanding debt plus any late payment fees from previous months.

This means that the interest is charged on an increasing debt which continues to increase the longer you fail to make sufficient repayments towards the debt.

Debt can be good or bad.

Bad debt is debt where the interest charged on the debt is accumulating faster than the original interest agreed on the debt. Bad debt is also where debt where the capital borrowed does not provide any comparable benefit to the borrower such as an increase in equity, income or similar. Example purchasing an item on debt where the item falls in value shortly after.

To avoid bad debt you should📑

Don't spend money you don't have on things you don't need
Avoid high interest borrowing
Avoid carrying over a debt balance from month to month without making your monthly repayments.

Good debt on the other hand is debt which allows you to gain or increase equity or income.

Good debt can also be classified as debt where the interest rate charged is comparable to what is offered on comparable debt and where the debt offers long term value.

Good debt can be:🧤

Your mortgage
Your car finance
Your student loans

Understanding Debt🙌
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