Does good debt really exist? While some people think that all debt is bad, the truth is that not all debt is the same. Some debts are really worse than others.
This is because some things are worth getting into debt for, others just aren’t.
What exactly is good debt?
It refers to long-term debt that usually pays off in the long run. This kind of debt helps you generate income as well as increase your net worth. Some common examples include:
A student loan is considered to be good because it helps you increase your chances of finding a high-paying job in the future. When you invest in higher education, it definitely pays off over the course of a lifetime.
Small business funding
Taking out a loan to develop your own business is another type of debt that’s good, provided that your business takes off and becomes profitable. The return on investment is huge if your business is a success.
If you can’t afford to buy a home, the debt for taking out a mortgage is a good because you are gaining a huge financial asset. You can buy a house, live in it for a few years or decades, then sell it and actually make a profit. You can also generate passive income by leasing it.
Bad debt is the type of debt that doesn’t provide any real benefits, causing only financial instability. Bad debt includes all debt that is used to buy depreciating assets. Here are some common examples of bad debt.
Vehicles lose value the moment they are purchased. You end up paying much more than the car was worth in the first place.
Borrowing money to afford an expensive trip is not a good idea. It’s better to save money until you can afford to pay it in cash.
Goods and services
Clothes, groceries, gadgets, as well as other goods and services are not worth getting into debt for. You will pay double the amount they are worth and will therefore waste money that could have gone into savings.