When it seems that a debt is unlikely to be repaid, then it is considered to be bad debt. When you spend money on something that depreciates with time, it is bad debt. Creditors are on the losing end in this battle because you may provide a service or sell goods to a consumer with the intention of getting paid, should they default, you end up losing your money plus your goods or services. While some consumers may promise to pay later, others may never pay at all which could cost you.
A good example of a bad debt is buying clothes using a credit card. The clothes will definitely depreciate the minute you step out of the shop, but you have amassed debt because of the amount you will eventually pay for them when your bill arrives. Not only will you be paying for the clothes, you will also pay for the interest accrued from your purchase.
Car loan are a classic example of bad debts but consumers never seem to learn. The value of car starts to depreciate when you drive off, but don’t forget you still have those monthly payments that come with interest to make. You may even end up paying more than the actual value of the car by the time you are done with repayments. To make it worse the resale value of the car will be lower than what you bought it for, so you will end up losing either way.
Financing a vacation with a debt is a bad idea. Just because you feel the need to rejuvenate, don’t get a loan to have some fun, because a vacation will never appreciate. Instead, save as much as you can, and reward yourself with a vacation.
Mercy Maranga writes content on Finance and Debt Management. Visit her site here for more information on Finance and how to effectively Manage your debts.
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