Is there such a thing as good and bad debt?
Debt has been around since about 8000BCE; people have always wanted things they could not afford readily. Mesopotamians needed some sort of system to record their financial dealings, and for this they invented writing. You might feel tempted to infer that the concept of debt is a good one because of this.
Most financial planners will advise you to stay away from too much debt, yet other financial planners consider all debt to be bad. But few people have trust funds and most need some form of credit to get the things that they need the most, such as a mortgage for a home.
The credit system has also evolved over the millennia, thankfully lenders no longer sell defaulting debtors into slavery! It has become easier to get credit so consumers borrow, sometimes recklessly so. But it helps to know what kind of debt to avoid.
Good debts should bring value, appreciate over time and increase our ability to earn money.
While it is true that individuals do things differently, most people do research before buying anything that requires long-term payment. Businesspeople create business plans and may not necessarily buy everything new as second-hand items will do the job as well.
Examples of good debt would include one of the following:
- A mortgage – this is one of the better debts as it allows you to have a home and the trend is for house values to increase over time, giving allowances for fluctuations in the housing market.
- Student loans – as this furthers your education which could lead to better job prospects and higher earning potential.
Anything that can help to make money in the long-term
Bad debt does not appreciate over time, generally has high interest rates and consumers mostly use such debts to support their lifestyles.
Consumers generally overspend because they feel entitled to a better lifestyle or because they struggle to control their impulses. It could also be a combination of these two factors.
Examples of bad debt would include one of the following:
- Store cards – Tend to come with exceedingly high interest rates.
- Credit cards – Interest rates and charges makes it very difficult to repay your credit card debt.
- Debt consolidation loans that are not used correctly and therefore create even more debt.
Debt that is neither good nor bad
- Car loans – unless the person buying the vehicle will use it to make money
These types of debt could be either good or bad, it depends on what the purpose is. Mortgages could also fall into this category – not everyone takes advantage of the fiscal benefits that mortgages offer.
And many more people take on ‘starter debt’ to fund their new lifestyles after finishing college and starting their first jobs.
In conclusion, all debt has the possibility of becoming bad debt if you’re not careful. Borrow responsibly and make the most of your good debt.