Good Debt vs Bad Debt

Yes, there is such a thing as good debt. Not all debt is bad. Even though you might consider it to be so when you face the overwhelming amount of debt that you need to repay and the problems that it has caused. At a certain level it is worthwhile having debt.

Having debt on appreciating assets such as a mortgage on your home is a good thing. The value of your house will be increasing at a rate that is far greater than the amount of money that you could save. And quite possibly you would never be able to save the amount of money required to purchase a house in the first place.

Examples of Good Debts

There are only a few types of debts that fall into this category, but it’s important to distinguish them. Some examples of good debts are:

  • Debt incurred to buy a home. Owning your own home is a good debt is because it is an investment — it gains value instead of losing it.
  • Student loans. Getting a college education is a good investment as well. By earning a degree, you put yourself in a position to earn more money over your lifetime.
  • Debt associated with starting a business. Starting your own business is a risky proposition, but it’s done with a plan for earning money.

Examples of Bad Debts

Bad debt is the debt that is incurred for purchasing items that are not appreciating assets. This will be the type of debt that is not worthwhile having simply because the costs of the debt far outweigh its advantages. Here are a few:

  • Auto loans. Having a car is a necessity for many, but a car loan is bad debt because an automobile loses value over time than gaining it. You will not recover your investment when you sell it.
  • Credit card debt. Credit cards are bad debt because the overwhelming majority of credit card purchases are things that lose value.
  • Most personal loans. Personal loans are often taken out to finance purchases of things such as appliances, furniture, and vacations. None of these things appreciate in value, so they are bad debt.

Should You Avoid Having Bad Debts?

Just because a debt is good, that doesn’t mean it can’t get you into trouble. You still need to keep this debt at a manageable level and don’t borrow more than you can comfortably pay back.

On the other hand, you do not need to avoid having bad debt. There’s no harm in taking on some bad debt to get the things you need and want. But make sure that you only use it for things you really need.

Credit cards are one of the biggest causes of financial problems in the country. But they too can help you rebuild your credit history if you take out smaller amounts of borrowings and pay them back on time all the time. In the long run you’ll be able to get a mortgage to purchase a house again even if you have bad credit history.

So in the right circumstances there are various reasons why debt can help improve your life. But racking up restaurant bills and purchases of the latest fashion items on your credit card are not good debt in anyone’s books.

Good Debt vs Bad Debt was last modified: April 9th, 2014 by Paul Sarwana