You may hear people talk about good debt or bad debt. What type of debt is good and how can you avoid the bad debt? You need to read this.
First of all, let me disclose that I personally think any debt is bad. The goal is to not have any debt at all. In our current society, this isn’t always practical, especially if we follow what most people do an never get really educated about debt. That said, while I would never qualify any debt as good, myself, there is debt that is…well, not as bad as other debt.
What Makes a “Good Debt?”
Good debt meets two criteria in my book. It comes with a low interest rate and may be worth the cost of the debt in the long run. A good example of this might be a mortgage. The debt is good because you need a place to live, and chances are that over time your house will appreciate in value. You may also get some tax breaks from a mortgage debt. Another possible better type of debt is a student loan, since having a degree could lead to better job opportunities.
Of course, being able to pay in cash for these things would yield you better rewards, but most of us, my family included, just aren’t there yet.
What Makes a “Bad Debt?”
A bad debt is one that is just the opposite of a good debt. It comes with a high interest rate and generally has nothing to redeem itself. Making high credit card payments for last year’s Christmas shopping, a high interest quick payday loan, and pretty much any other kind of debt outside the mortgage or education is bad debt.
What about car loans? Sometime they are necessary and carry low interest rates, but cars depreciate rapidly. Better to buy a used car with cash and then upgrade it as you can afford to without the loan.