While some people may count debt as a no-go area, some individuals count it as if it is part of life. This is a very bad idea, as debt shouldn’t be taken as a normal thing in life. The term ‘payday loan’ is used to describe an integral example of bad debt. You may be wondering if there is any term like ‘good debt’, yes there is! And this article is going to shed more light on all those confusions.
What is Debt?
Debt can be defined as an amount of money borrowed by one party from another over a stipulated period of time. It is an instrument used by individuals and enterprises to make large purchases which they could not afford under normal circumstances.
An agreement of debt gives the borrower the permission to bear the possession of the borrowed item under the condition that it is is to e paid back at a later date, usually with interest.
Debt can be classified into four main categories; secured, unsecured, revolving, or mortgaged. But the focus of this article is going to be on good and bad debt as payday loan fall under the bad category of debt.
In a loan agreement, the amount borrowed, the attached interest, and the return day are stipulated therein. The interest rate is always expressed as a percentage of the loan amount.
The significant of an interest is to serve as a compensation for the lender who take the risk of lending out the money and to encourage the borrower to pay the money as early as possible so as to minimize his total interest expense.
Types of Debt
There are two types of debt asides from the once categorized above. The category is based on the usage of the borrowed money. They are; good and bad debt.
Good Debt: This is a situation whereby a borrowed amount of money takes dividends in the nearest future. This type of debt is considered to be good and it include; student loans, mortgages, and small business loans.
Bad Debt: Bad Debt is a situation whereby you are taking money from your future self to spend more today. An example of a bad credit is the act of pulling our one’s credit card in order to afford a football ticket. Generally, any debt that wouldn’t bring any future fortune but only funds the present lifestyle is considered a bad debt. Some types of bad debt include; auto loan, credit cards, and payday loans.
Payday Loans is a prominent example of a bad debt. They are usually small-dollar loans which falls under $500, that are due at one’s next payday. Many states in the US prohibit this type of loan as it is the most expensive of its form.
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Why you should avoid Payday Loans
You should avoid payday loans for the vulnerability of paying higher interest rates. These higher interest rates make it very hard a task for people to pay the loan back before the stipulated deadline, placing them at higher risk of default.
Note also that the more you delay the payment of the loan, the interest charge become inflated and you end up being financially insecure. In conclusion, a payday loan should not be considered an option no matter how urgent the need for the fund may be. You should try to increase your credit score by updating your credit card so as to be qualified for a great deal of available loan.