Question

question 13

mariam plans to take a loan to cover her college tuition, seeing it as an investment in her future earning potential. in contrast, amira is thinking about using a credit card to purchase a luxury handbag she currently cannot afford. both are interested in understanding how their debts will affect their finances.

given this scenario, what is the key difference between good debt and bad debt?

• bad debt encompasses mortgages and student loans.
• good debt contributes to long-term growth; bad debt funds depreciating or nonessential purchases.
• all debt is harmful and should be avoided whenever possible.
• good debt typically refers to business loans, while personal loans are generally considered bad.

Explanation:

Analyze the scenario and definitions of debt

Mariam's student loan is an investment in her future earning potential, which is expected to increase her long-term financial value. This represents "good debt." Amira's credit card purchase of a luxury handbag she cannot afford is a nonessential, depreciating consumer item. This represents "bad debt."

Evaluate the given options

• Option 1: Incorrect. Mortgages and student loans are typically classified as good debt because they can build equity or increase earning potential.
• Option 2: Correct. Good debt is used to purchase assets that can generate income or increase in value over time (long-term growth), while bad debt is used to purchase depreciating assets or nonessential consumer goods.
• Option 3: Incorrect. Not all debt is harmful; strategic borrowing (good debt) can improve financial standing.
• Option 4: Incorrect. Personal loans can be good debt if used for investments like education or home improvement, and not all business loans are automatically good.

Answer:

• (A) Bad debt encompasses mortgages and student loans.
• (B) Good debt contributes to long-term growth; bad debt funds depreciating or nonessential purchases. (Correct answer)
• (C) All debt is harmful and should be avoided whenever possible.
• (D) Good debt typically refers to business loans, while personal loans are generally considered bad.