What does it mean to be debt-free?
Being debt-free does not always imply that you are debt-free.
Debt is unavoidable for the majority of us. It’s the only way we’ll be able to buy the house of our dreams or expand our business. On the other hand, debt can be both a blessing and a curse; it can provide us with a better way of life while also bringing us misery and difficulty. The first thing to realize is that being debt-free does not always imply that you are debt-free. Given the word “debt-free,” this may seem paradoxical… but it all depends on the type and quantity of debt you have.
But first, what is debt?
Debt is money borrowed for a predetermined time to meet a financial necessity. These can be either corporate, in which case you’d like to invest in your company, or personal, in which case you’d like to invest in yourself.
There are two types of consumer debt: secured and unsecured. A secured loan has some form of security against which you are borrowing. If you don’t make the payments, the bank has the legal right to take your collateral to repay the loan.
Unsecured debt is credit given to a person based on their credit and purchasing history and has no collateral. This is a high-risk debt because the bank has no collateral to fall back on if the borrower defaults.
Good vs. Bad
Good debt is debt that will offer you financial rewards in the future. It’s something that boosts the value of your property or increases your net worth. So a good debt is something like a house or a piece of property. That house or property will ideally grow equity, allowing you to turn your debt into profit. A company loan is another example of beneficial debt. If your firm succeeds, you’ll be able to earn from your early debt for the rest of your life.
The word “good debt” relates not just to the sort of loan but also the terms. Debt with a low-interest rate and no fees or penalties is considered outstanding debt. The rationale for this is that if you fall behind during difficult times, the long-term consequences are significantly less severe.
In most cases, bad debt does not have a long-term solution. This is money that you borrow because that will not result in a profit or gain. The best example of poor debt is a credit card, but we’ll also discuss others. What makes credit card debt bad? High-interest rates, fees, penalties, and a lack of equity are all considered factors. In other words, you’ve got nothing but a considerably greater postponed payment than the original. A payday loan is another example of bad debt. These predatory loans have interest rates as high as 500 percent and are nearly challenging to repay if you fall behind.
So, what exactly does it mean to be debt-free?
As you can see, the answer is not simple. To begin with, being debt-free entails having few to no bad obligations and an average amount of good debts. You don’t have to be debt-free to have a mortgage, bills, or a car payment. It indicates that you have a moderate level of debt and are aware of your borrowing.
You can still be debt-free if your debt is working for you rather than against you.