Is there such a thing as good debt?

12/01/2015


If I could, I wouldn't have debt.  Unfortunately there are things we can't get without being considered a credit-worthy borrower.

David Bach, author of the Finish Rich  says, "debt is basically bad and difficult. It comes down to the interest rate."

And I agree. At the end of the day, whether you consider your better debt or worst debt, the fact is it is debt. And that means you owe someone money.

Bach goes on to explain the difference between better debt and worst debt. He says, better debt is a loan with a low interest rate used to purchase something that adds value. And that the worse debt is used to buy a depreciating asset or debt used as a substitute for cash.

Example of better debt
Home Loans.  A home loan can be a good debt, because it will enable you to purchase a home to live in. Once that mortgage is paid off, that home will be a big financial asset, which is likely to grow in value over time and the monthly mortgage payments could be cheaper than renting. Still it's important to mention that along the way this can be quite a liability, so planning on your side will be needed.

Example of worst debt 
Borrowing money to pay bills. If a bank calls you and offers you a loan to consolidate debt, reject it. You can't pay debt with debt.  At the end of the day you are still left with debt and this time around you might have a bigger one.

There are some debt that fall into a bit of a gray area. To help you make this distinction, it is important to be able to differentiate between your wants and needs.The best example of this would be buying a car. In general borrowing money to buy a car would be considered to be bad debt since the value will almost always go down. However it may be that the car that you buy is cheaper to operate and maintain than the one that you currently have. In this case the debt is no longer so bad; you have to determine if the money you save will offset the amount that you have to spend to borrow money to buy the car.

The distinguishing factor between good debt and bad debt is the overall value of the debt. The question you need to ask yourself is this: which costs you less money in the long run?

So now that you know, you must be careful that you don’t take on too much debt, even if it’s good debt. If you’re overloaded with debt, then it doesn’t matter whether the debt is good or bad, it still hurts your financial health. Good debt is obtained through making wise decisions about your future, not for the sole purpose of having good debt.

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