Good Debt vs Bad Debt

Beginner: The Words Lenders Use

Principal is the money you actually borrowed

Principal is the amount you took out, before any fees or interest get added. If you borrow 1,000 dollars, your principal is 1,000 dollars.

Everything else a loan charges you is stacked on top of that number. Knowing your principal is how you tell the real price of the thing from the price of borrowing to get it.

Interest is the rent you pay on money

Interest is what the lender charges you for the use of their money over time. It is usually shown as a percentage.

Here is the part that catches people. Interest keeps charging as long as you owe. Two people can borrow the same 1,000 dollars, and the one who takes three years to pay it back pays far more than the one who pays it back in six months.

APR is the honest yearly price

APR stands for annual percentage rate. It rolls the interest and many of the required fees into one yearly number so you can compare two loans fairly.

A loan can advertise a small monthly payment and still carry a brutal APR. Always ask for the APR, and compare loans by that number, not by the monthly payment alone.

So what makes debt good or bad

Good debt tends to fund something that can grow in value or increase what you earn, and it comes at a reasonable rate you can actually afford.

Bad debt tends to fund something that loses value or disappears the moment you use it, at a rate that eats you alive. Same word, very different outcome.