Getting into debt can create difficulties for so many people, as a result the word itself has become a term that has a negative connotation.
However, as many experienced investors will tell you, debt is not always a bad thing. So how can debt be considered ‘good’ in any way?
In order to understand the positive forms of debt, we need to understand what the two types of debt are.
Bad debt is mostly associated with purchases through credit cards and other expenses such as car finance loans. This is a liability which takes money out of your pocket.
These are debts that cover initial purchases, which have no possibility to increase your earning potential. From the moment you take out the loan and become indebted you will either maintain the same value for the purchase (though 0% finance loans, etc) or lose further money through interest rates on your loan. Therefore, the car you bought may have been displayed for sale at £15,000 but adding interest to your loan over a period of time can result in you paying more than your original purchase cost.
This type of debt is also based solely on your ability to self-fund the monthly repayments from your income.
If your ability to repay the debt changes in any way this will cause damage to your credit score. This debt still needs to be paid.
In comparison, good debt is where your money works for you.
This typically involves investing money and borrowing additional funds to create a sustained income. Good debt is created through logical thinking and planning ahead towards an end goal, such as a property investment. The money is borrowed; however, you are using the initial borrowed funds to generate an income to pay off the original debt. By using debt to purchase a property, you can then create rental income and self-sustain the loan repayments. This is good debt.... Or Leverage.
By creating revenue streams from debt, you are allowing your money to exponentially increase over time. Since the revenue stream is separate from your own personal finances it can allow you to think critically in regard to increasing profitability and reducing costs to maintain a healthy level of debt.
By understanding and applying the use of ‘good debt’ you can create valuable streams of income. This in turn will allow you to use profits to generate further income and make money work for you, rather than you working for the money.
In what other industry will a financial institution give you money to leverage and generate an income.
Don’t be afraid of debt.... Be afraid of bad debt.
At Cunningham Doherty Property Group we review various property deals and can assist in the structure of any finance or find the best solution to hit your goal.
Yorumlar