Good Debt Vs. Bad Debt

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When it comes to debt, most of us would probably like to be completely free of it altogether, but for most of us that simply isn’t practical – not all the time anyway – and actually, there are ‘good’ and ‘bad’ debts to have. For example, if you’re using debt to acquire something that is truly essential to your life, or to do something that will actually enrich you in the end, then it cannot be said to be bad now, can it? The key is to be able to make the distinction between good and bad.

To help you differentiate between debts that are okay and those that should most probably be avoided, here are some examples of good and bad debts:

GOOD DEBTS

Student Loans

There can be few things better than borrowing money to advance your education so that you can earn more money over the course of your life, Sure, there are probably some people who regret their student loans, but for the vast majority, they are a debt worth taking on.

Loans for Medical Bills

Although it’s much better to spend your money on medical insurance, if that isn’t possible, or your insurance doesn’t cover the kind of treatment you need, it is obviously sensible to take out one of the best low-interest personal loans to pay for your treatment. After all, there is nothing more important than your own life, and no debt worse than a death!

Mortgages

Taking out a home loan can be pretty daunting, but by buying your own property, instead of effectively throwing your money away on rent, you are investing in your future, and many home loans are actually cheaper per month than rent, so you’re saving money too. It’s a no-brainer.

BAD DEBT

Credit Card Debt

You might not think so since their use is so ubiquitous in our society, but credit card debt is almost always a bad choice. Why? Because credit card interest rates are much higher than the average personal loan rates, which means that your spending can spiral out of control pretty quickly.

Non-Essential Debt

Whether it’s loans, credit cards or store credit, any time that you use credit to buy the non-essentials in life such as expensive clothes, gadgets that you could easily do without and a lifestyle that is really beyond your means, it is a bad decision that will leave you much poorer in the long-term.

Money Borrowed from Your 401k

It is possible to borrow money from your 401k, but most of the time, when you do this, it represents a bad debt because you will be hit with lots of early withdrawal penalties if you don’t pay it back on a timely manner. The only circumstances when it might make sense is if you have a medical bill to pay or you want to invest in a property that you can live in.

The Bottom Line

Financial matters in the modern world can be difficult to deal with and many of us will need to borrow money, but as long as we know the difference between bad debts and good ones, this need not be a worry if we can stay on track.