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No one wants to stay in debt. But there are some times when you need to owe money in order to reach a higher goal. It can be argued that the economic system requires some level of owning and borrowing. So, knowing whether debt is good or bad for your business is important. You can also consult a Chicago debt defense lawyer before taking any such decision. Below are some things you should consider while taking a loan.
Things to know about good debts and bad debts
- A planning problem can not be solved by debt.
Debt will indeed help you manage your finances, like a consolidation loan, which is considered good debt. However, if your business is in trouble, you can simply take on new obligations, which will rarely solve the issue. You should have a specific reason or plan for taking additional debt to make it helpful.
- Net worth can be increased by good debt.
Good debts like student loans can help you get a better-paying job. Home improvement loans that increase the value of your house are also considered good debt. Loans that help you purchase additional supplies or hire extra staff are also beneficial. You must ensure that you have adequately planned and can make more than the cost of the debt.
- Do not take debts for things that decrease the value.
The most obvious example of bad debt is a car loan. According to the survey, cars lose 20% of their value in the first year of ownership. Loans that do not lead to you making more money will indeed cause a value decline.
- Other people’s issues can also cause your problems.
If you have a business, you should not consider yourself a lender. But if you provide products or services for someone before receiving full payment, you indirectly loan them money. Unpaid invoices are bad debts. If an invoice is 90 days past due, statistics show there is already a 30% chance it will never get paid. It will increase to 75% when the invoice is a year past due.
- Interest rates matter
High-interest loans are dangerous and are considered bad debts. Some companies have products with interest rates of 50% to 150% per year. Your credit rating will affect the interest rate when offered a loan. It is one of the reasons why you should keep tabs on your credit score and be cautious about the money you owe.