Is there Good Debt?
Yes, there is such a thing as good debt. There are only a few types of debt that fall into this category, but it's important to make the distinction. Some examples of good debt are:
Obtaining a mortgage to purchase your home would be an instance where making a debt would be a good thing. Investing in a home is smart because your home will appreciate so even though you are taking on a debt you are in a position to earn money in the long run.
Borrowing money for college is also an investment ? in your education. By educating yourself you give yourself more earning power. This is an instance when taking on debt is a wise choice.
If you obtain a start up loan for a business venture this can be good debt. Again you are borrowing in order to give yourself earning potential. Of course you are always taking a chance when going into business for yourself, but often it is worth the risk and the necessary debt incurred.
More often we talk about debt that is not so good. Some examples of this are:
Financing a car ? unlike a home your car depreciates rapidly. That means you are not investing your money with the potential for a greater return in the long run. The money you spend is gone.
* Credit card debt - Although credit cards can feasibly be used to purchase things that appreciate, they are in general considered bad debt because of the types of things that are usually bought with them. The overwhelming majority of credit card purchases are things that lose value.
* Most personal loans - Personal loans are often taken out to finance purchases of things such as appliances, furniture, and vacations. These are often things we need, and a vacation can even help us become more productive, allowing us to potentially earn more. But none of these things appreciate in value, so they are considered bad debt.
Just because a debt is a so-called good debt, that doesn't mean it can't get us into trouble. It's important to keep our good debt at a manageable level. Lenders take our income into consideration when lending us money for this reason. But it's also crucial that we look at our individual situations and not borrow more than we can comfortably pay back.
Also, bad debt is not always something to be avoided. To have a reasonable amount of what is considered bad debt is fine. We just want to keep it at a moderate level and not allow it to get out of control. Just like good debt we want to be sure we can handle the payments and only take on bad debt when necessary.
Obtaining a mortgage to purchase your home would be an instance where making a debt would be a good thing. Investing in a home is smart because your home will appreciate so even though you are taking on a debt you are in a position to earn money in the long run.
Borrowing money for college is also an investment ? in your education. By educating yourself you give yourself more earning power. This is an instance when taking on debt is a wise choice.
If you obtain a start up loan for a business venture this can be good debt. Again you are borrowing in order to give yourself earning potential. Of course you are always taking a chance when going into business for yourself, but often it is worth the risk and the necessary debt incurred.
More often we talk about debt that is not so good. Some examples of this are:
Financing a car ? unlike a home your car depreciates rapidly. That means you are not investing your money with the potential for a greater return in the long run. The money you spend is gone.
* Credit card debt - Although credit cards can feasibly be used to purchase things that appreciate, they are in general considered bad debt because of the types of things that are usually bought with them. The overwhelming majority of credit card purchases are things that lose value.
* Most personal loans - Personal loans are often taken out to finance purchases of things such as appliances, furniture, and vacations. These are often things we need, and a vacation can even help us become more productive, allowing us to potentially earn more. But none of these things appreciate in value, so they are considered bad debt.
Just because a debt is a so-called good debt, that doesn't mean it can't get us into trouble. It's important to keep our good debt at a manageable level. Lenders take our income into consideration when lending us money for this reason. But it's also crucial that we look at our individual situations and not borrow more than we can comfortably pay back.
Also, bad debt is not always something to be avoided. To have a reasonable amount of what is considered bad debt is fine. We just want to keep it at a moderate level and not allow it to get out of control. Just like good debt we want to be sure we can handle the payments and only take on bad debt when necessary.
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posted by Credit Counseling at
4:31 AM
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