When you get into debt you have to take into account several factors, the amount requested, the interest rate, payment facilities, etc.
However, one of the most important points to consider is that the loan money will be dedicated. Is it for something necessary or for a whim?
Normally, depending on whether it is for something necessary or rather for a whim, it is also called “good debt” or “bad debt.”
Differences between good debt and bad debt
A good debt is one that after paying the credit you get a benefit, either economic because for example you have used the loan money to invest in something with a higher return, or an improvement in our quality of life.
A bad debt is one that after paying the credit, you don’t have any of the above benefits.
One of the purchases with which it is usual to borrow is to buy a car. It is a debt that is halfway between good debt and bad debt, since the car may be a necessary asset but also a whim if you buy a more expensive car than you really need. Let’s see what characteristics you share with each of them and in which it differs.
Why is it a bad debt?
Cars depreciate rapidly . When you borrow money to buy an asset that depreciates at high speed, you are simply losing money .
Loans to buy a car are loans with high interest rates . This higher rate is due to the fact that it is a consumer credit. It is usually at least 8%, but rather reaches up to 10%. Any loan that has such a high interest rate means that you are going to invest a large part of your savings to pay interest.
A car can be paid in cash, or at least a large part, if you make careful planning . If you manage your expenses carefully, anticipating your needs, you may pay the car in cash, so it is not really necessary to request a credit as it seems to be mandatory.
Why is it a good debt?
Having a car opens the door to higher labor income , since it allows you greater labor flexibility, which broadens your potential radius to find employment.
If you make a careful purchase, you can reduce the depreciation of the car . If you buy a high-end car, say a Mercedes or a BMW, your car depreciates more slowly than a low-end car. Of course, these cars are more expensive at the time of purchase.
Sometimes the entities offer special credits to buy a car , with low interest rates, even reaching 5% -6%.
There are logical arguments on both sides, personally I think that from a solely economic point of view the purchase of a car through a credit is a bad debt, although aspects such as greater labor mobility and the possibility of traveling more comfortably, which it causes us a better quality of life, they partly balance the issue.
Anyway, the best option depends on your needs and tastes , there is no perfect recipe for everyone.
Without forgetting that there is also the option of renting, which is opening more and more hollow, with very attractive prices. But in this we will enter another article.