/ What is bad debt?

What is Bad debt?📛

Before we go into what bad debt is we must understand what debt is.

So what is debt?

Debt is basically borrowing money from others under the condition that it needs to be paid back at a later date, usually with interest added to it.

ExampIe: I will lend you £5000 only if you return it within 6 months and you will pay me 10% interest for the term so £500.

Debt is essentially an obligation or liability which you need to repay.

A creditor(someone who lends money) can be an individual, a company or a government.

Bad debt is classed as debt that does not add any future or long term monetary value but rather goes into depreciating assets.

Bad debt essentially takes money away from you with no long term monetary gain while good debt has monetary gain, short or long term.

E.g of Good debt could be mortgages for income generating commercial property or rental property or credit card spend on business investments.

In the case of real estate, the mortgage is paid off by rental payments which means your debt is being paid off by the rental income and you are generating equity in the property as you own more.This is good debt.

So good debt can be used to generate capital gains e.g real estate increasing in price and making a profit on the purchase price) or cash flow(e.g businesses making money from the stock purchased on credit cards).

Bad debt is when the debt is financing your shopping and things that have no monetary value. Avoid Bad debt!

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What is Bad debt?📛
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