Can Debt Ever Be Good?

Can debt ever be good?

Most financial experts say yes; some, however, say no.

What is good debt, then?

By general consensus, good debt is any debt that can be considered an investment. A home loan is a good debt. A personal loan to pay for university or college is a good debt. A business loan is a good debt.

These are all investments for your future. A student loan is an investment in your future career and earning potential. A business loan is an investment in your career and your earning potential. A home loan is an investment in your future security, and call also be considered an investment for future earnings if you ever plan to sell.

What is bad debt?

Bad debt is any debt that doesn’t increase your worth; it can’t be considered an investment of any kind. An account at a retail store, one that you happily take advantage of so that you live right on the maximum credit limit, is bad debt. Credit cards are bad debt because, more often than not, they’re used to finance non-essential items, like clothes, jewellery, holidays and expensive Christmas presents. Dipping into your pension fund is bad debt because it strips you of future financial security. It’s also usually a last resort for people who are already in debt up to their eyeballs, which means that the chances of paying it back are slim.

Where do car loans fit in?

This is where opinion is divided. Some financial experts call it good debt and others call it bad.

CNN Money says that car loans can be good if you intend keeping your car for quite a long time. This is because cars depreciate in value rapidly, and because the interest rates on car loans are also quite high. The longer you keep your car, the more value you get out of it. The ideal is to pay a large deposit, at least 10% but preferably more, so that you minimise the loan amount.

Ryan Ortega (AskMen) says that car loans can be good debt if you buy a used car with low mileage. Otherwise they are generally bad, albeit necessary.

Can debt ever be good?

We keep coming back to this question. David Francis (US News and World Report) cites David Bach, author of the Finish Rich series, who says that debt can’t be divided into good and bad. He says that there is only debt and that debt is generally bad. Instead, Bach refers to better debt and worse debt. Better debts are those that come with low interest rates and which are used to buy assets that appreciate in value. Worse debts have high interest rates and are used to buy products that depreciate or have no value at all.

There are two important considerations

These are the two key considerations that should always govern your decision to enter into debt:

1)     Your ability to pay it back as quickly as possible.

2)     Your ability to keep your debt within manageable parameters.

Basically, don’t take on more debt than you can manage. Don’t buy items you really don’t need, like that pair of Manolo Blahnik stilettos or that first-class cruise around the Caribbean. And always, always, repay your debts as quickly as possible.