Sometimes people think about debt as being “bad” and not a good thing to have, but I believe there is such a thing as “good” debt. I feel like it’s important to discuss what good debt is and what bad debt is. Also, I think it’s important to discuss the difference between good debt and bad debt. My goal is to be able to do just that.
First, I am going to talk about good debt. Good debt is debt that is an investment, it doesn’t lose value, increases value, and can generate income short-term and long-term. Could good debt turn into bad debt? My answer is you bet it can! For example, if you buy a home because it’s considered a “good debt”, but don’t have the income to support the mortgage payment, then that’s when it becomes a bad debt. It’s the same thing with investments. There are good investments and bad investments. When it comes to good debt, you really need to make a wise decision and think it through (weigh the pros and cons) because it could come back to hurt you, and that’s true with any debt.
Some debts that are consider good debts are:
- Mortgage/Home Loans – The reason why home loans are considered good debt is because you are making an investment by making a monthly payment, until it’s paid off. If you try to sell your home at anytime, you are likely to at least get back what you paid for the house. It’s an investment that creates value and can generate income when you sell.
- Student Loans – The reason why student loans are considered good debt is because it allows you to get a degree and hopefully in the future have a good paying job. It’s an investment that will create income (if you graduate with a degree).
- Business Loans – This is considered good debt because it is an investment and the outcome of creating a business from the loan is income. Obviously, your business needs to be generating income, in order to consider this good debt.
Now let’s talk about bad debt. Bad debt is debt that is not an investment that will generate any type of income. Bad debt can be really dangerous and can get out of hand quickly. For example, it person may get a credit card and use it to make purchases and only pays the minimum payment. This is dangerous because the likelyhood of this person making more purchases, while paying the minimum payment is very likely. The result of doing this is that you are increasing your balance, and it could take years for you to ever catch back up. It’s important to be wise and be responsible for the bad debt that you have, you definetly do not want more bad debt than good debt.
Some debts that are considered bad debts are:
- Auto Loans – This is considered bad debt because vehicle’s value drops significantly when taken off of the lot. The value of the vehicle will keep decreasing overtime. If you buy an expensive car then I can pretty much guarantee you that you will never sell it for the price that you paid. It comes down to a bad investment and it does not generate income.
- Credit Cards – The reason why credit cards are considered bad debt is because if you don’t pay the balance in full, then you will likely overpay for items that you are buying and ultimately, you will lose money. You definitely have to be wise and responsible when using credit cards. It is very easy to get behind and get overwhelmed by the interest rates, especially if you are just making the minimum payment.
- Store Credit – This is considered bad debt because it’s not an investment and it does not generate income. Store Credit is similar to credit cards. They usually are high interest rates, which makes it hard to repay the credit line. Just like credit cards, you are likely to overpay for items and ultimately you will lose money.
I think it is very important to be wise when dealing with good debt or bad debt. Ultimately, it comes down to being responsible with your finances and making the right decisions. I will end with this quote.