Good Debt versus Bad Debt

We’ve all got debt in some shape or form, but not all debt is created equal. Believe it or not, there are actually good forms of debt out there. Typically, good debt is characterized as having a low interest rate and the opportunity to get a good return. As you could probably guess, bad debt has a higher interest rate and is usually a burden. Here we’ll explore different types of good and bad debt.

Good Forms of Debt

• Although it may depend on your specific mortgage terms, a home loan is generally a good form of debt. Even with all kinds of market fluctuation, most people end up making money off their home when it comes time to sell it.
• Student loans are almost always considered a good form of debt. Of course, that’s assuming you make the most of your time in college and end up with a good career that you otherwise couldn’t have achieved.
• Another form of good debt can be found in business loans. There’s always some risk in trying to open your own business, but a business loan can definitely pay off in the long run.

Bad Forms of Debt

• Even though almost everyone finances their vehicles, most car loans are considered bad forms of debt. Why is this? Primarily because more and more people are taking out car loans that take several years to pay off. The vehicle’s actual value is only a fraction of that loan by the time it’s completely paid for.
• Possibly the most infamous bad debt comes in the form of those department store credit cards. Most people know them as the credit cards that you get lured into by getting a discount on your first purchase. While you may save a couple bucks on that first purchase, you’ll end up paying hundreds more thanks to their ridiculously high interest rates.
• Almost any type of high-interest installment loan could be considered bad debt, especially if it’s for something you don’t absolutely need (a new big-screen TV for instance). Over time, you’ll end up paying significantly more for anything you purchase with the loan.