Bad Debt

Bad Debt

Borrowing for depreciating assets

Using debt for buying depreciating assets is a bad debt. When you take out loans for depreciating assets and you have to pay not only the principle purchase amount but interest as well, then you lose. Examples of such items are car loans, or credit card installments for the latest designer handbag etc. With this you end up using more productive money to service interest on loans for unproductive items rather than for investments that can generate more money.

Money you work for should be using the majority of it for appreciating assets. You need to teach your children that some of the depreciating assets that people buy are very much linked to their emotional state. They buy to make themselves feel good, or they buy because they cannot wait an practice delayed gratification. When you or your children learn to deal with these issues you will be less likely to waste money on depreciating items.

Cash adcances and borrowing without collateral

Taking debt without collateral, such as cash advances with high interest rates are bad debts. Cash advances are one of the worst things to do with your credit cards. A credit card is meant to be used and paid off in full at the end of each month. When you carry your balances forward or take cash advances on your credit card, you then get into a position where you have debt without any collateral.

Banks know that if you don’t have collateral, they are taking a bigger risk with you. The higher the banks risk, the more interest they will charge you. Be very careful and don’t be too glad when you are offerd a high interest cash advance or loan without up to 75 % interest on the principle amount taken over the tenure of the loan.

If you need cash, work for it, save up for emergencies, follow the principles in this book, and teach your children to follow them as well, so that they the money quotient to avoid the traps that get people tie up in so many bad debts.

Using borrowings for wrong purposes

Using funds taken as loans for something other than the purpose for which it was borrowed is very bad debt. People sometimes take loans meant for a particular purpose and then use it for a different purposes. For example, I know people who have taken small micro business loans, meant to be used to kick-start business venture or their business espansion taking it to the next level to generate more income. Instead, they used it for other purposes that do not generate income. They used it as a down payment for a car, or used it to buy fancy laptop computers or smart phones, fashionable products and other types of purhases driven by emotional desires. It is used for every type of purpose except the one for which it was intended.