Debt doesn’t have to be a bad thing. In fact, debt can be a good thing – a valuable investment or a home for your family.
Of course, if mishandled, debt can become a serious burden on your future. But if you understand the difference between good and bad debt, you can take advantage of the opportunities that good debt can provide and avoid the pitfalls that may come with bad debt.
So when should you feel comfortable taking on new debt, and when should you approach new debt with skepticism? Let’s take a look at a few examples of good debt vs. bad debt.
Education: For the 2014 – 2015 academic year, the average total cost of tuition for a 4-year public institution was $8,440. For a 2-year public institution, the average cost was $3,270. That doesn’t include cost of living, books or any other expenses associated with attending school. That’s a lot of money, and for many of us, a loan is the best strategy for handling those costs. And with a college degree, you’ll be better equipped to pay back your loan while also setting yourself up for even greater success in the future.
Small Business Ownership: If you have a great idea and the ambition to start a business, don’t let a lack of funds keep you from reaching for your dreams. A loan could give you the capital and cash flow to get your business off the ground.
Mortgage: Taking out a loan to purchase a home is one of the most common types of good debt. Most of us are unable to pay for a home with cash, and a mortgage allows you to pay for a home over a long period of time. This type of long-term debt can come with relatively low interest rates and manageable monthly payments depending on your financial situation.
Medical Expenses: There’s nothing more important than you and your family’s health, which, when you look at it that way, makes paying for medical expenses a form of good debt. If you or your family are having health issues, taking on debt, like a loan, to pay for care may be an option.
What is Bad Debt?
Bad debt is made up of loans that will not be repaid, according to the Merriam-Webster dictionary.
Debt.org also points out that debt can be bad when the amount of interest and fees paid exceeds the cost of what you’re purchasing. Bad debt can also include loans from questionable sources, such as payday lenders, which vary greatly from personal loans.
When it comes to using a loan for specific items – like clothes or cars or vacations – it’s really hard to say whether it’s good or bad, because you don’t know that individual person’s circumstances or the reasons behind what they’re buying.
There are always risks associated with taking on debt, but not all types of debt are created equal. Investing in yourself and your future can be an empowering and responsible act, while short-term solutions can keep you swimming upstream.
In any case, being responsible about paying back your debts should help you accomplish your goals in taking out the loan.
Take a look at all of your options, and we’re confident you’ll make the best decision for your financial situation.