It is generally because we lack the cash to make a large purchase while borrowing money, such as for a vehicle, home or college. An significant question to ask yourself when investing, though, is whether the purchase you intend to make generates good debt or poor debt.
For something that will go up in value over time , good debt is called borrowing. Real estate, a corporation or for education purposes , for example. Education loans may be viewed as good debt, as the income should be improved.
Bad debt is debt that is used to finance something that has no value. Car loans, personal holiday loans and the use of credit cards for consumable goods are some examples.
Furthermore, poor debt loans are typically not ideal for your financial well-being, since they usually have higher interest rates and are not tax deductible. On the other hand , good debt lending is also tax free and brings lower interest rates.
Ideally , the best thing is not to have a poor debt. A certain amount of bad debt, however, can be okay and inevitable in some situations.
Some financial professionals say that it is sufficient for 10-20% of your annual income to be made up of bad debt loans. But, going above 25% is heading into a hazard zone that could be hard to get out of. The amount of interest charged becomes so high as you get into this high debt range that it results in a loop which can not be reversed.
So, just try to take into account the sort of debt (good or bad) that you accumulate before getting a loan. This suggestion will go a long way to helping you be a financially competent borrower.