Most people believe that being in any debt is a negative thing. This was never more evident than after the hard-hitting recession of 2008, when overspending ways, living beyond one’s means, and heavy borrowing caught up to millions of Americans. While many are still trying to work their way out from under the debt, and personal bankruptcies just now coming down from record highs, it’s easy to view debt, in any form, as being a bad choice.
However, not all debt is bad debt. It’s almost impossible for us to live debt-free in a modern world. Most of us are unable to pay for a house or a college education in cash. While it wouldn’t be considered strictly “good debt,” the borrowing of money to pay for certain experiences and expenses are considered necessary to the improvement of your life and future. Those types of debt ultimately enhance your life in the long run, and therefore are worth the interest rates and temporary burden.
What are some forms of “good debt”?
Student loans. Most families aren’t able to pay for college tuition and other expenses outright. Student loans are often the only way many households are able to afford higher education. However, as this is an investment in your or your child’s future, as further education generally leads togreater income potential, student loans are generally considered “good debt.”
Mortgages. Like college educations, most households aren’t able to pay for a house up-front, in cash. However, property is also considered an investment, as homes generallyappreciate over time. Mortgages tend to have lower interest rates than other debts, with the interest being tax deductible. And the relatively low monthly payments frees up the rest of your income for emergencies and other investments. As a mortgage is an investment into property that can improve your overall financial standing, this is a loan that is worth borrowing. Try to put down as much as possible without completely depleting your cash reserves so that you’ll pay less interest over time.
What’s considered “bad debt”?
Credit card debt. Universally held and universally reviled, credit card debt is the enemy of a sound financial plan. As of 2012,the average U.S. household has nearly $15,950 in credit card debt. Credit cards have a higher interest rate than most loans, and often is not an investment in something tangible that you can liquidate to pay off the debt. Credit cards are often used to buy things that aren’t investments and quickly lose their value. They’re also often used to purchase things that you don’t need, and can lead to you living beyond your means. Remember a deal is not a deal, if you’re paying high interest rates on it for years to come. Find out more in regards to debt solutions by visiting National Debt Relief’s site.
Payday loans or cash advance loans. Interest rates on payday loans are exorbitant,starting at 300 percent annually (compare that to the already high 25.99 percent on some credit cards and the 3 percent on average mortgages). You are also charged all manner of fees when you borrow the money, and when you are unable to pay the loan. Note: when you take out a payday loan, you have until the next payday to return the money you borrowed, plus the fee, plus the interest accrued during that time period.
Debt gray areas.
Car loans. While a car is often considered a necessity in modern living, how much you borrow to buy an automobile can move this “good” debt to “bad.”A car’s value depreciates steeply from the minute you drive off the lot, so it’s not exactly a long-term investment. However, you can turn around and sell it for the cash to pay off your debt, so at least it is a tangible resource. Also, while a car is necessary, taking out an enormous loan to pay for a top-of-the-line luxury vehicle is not. Get a car within your means to keep the auto loan from going “bad.”
Debt can quickly become unmanageable, so make sure you’re borrowing money to help improve your future or improve your income streams or potential, and that you’re only borrowing as much as you need. Set up a payment plan to help you get out of the debt, regardless of whether it’s considered “good” or “bad,” as quickly as possible. Keep in mind that any form of “good” debt is still debt, and will make a lasting impact on your financial future.
Dave Landry Jr. is a financial expert and money consultant, advising people on smart ways to invest, save and use their money for the past several years. He hopes you enjoy this article and will have a further understanding of debt and its several different shades.