Not all debt is bad debt; how to tell the difference
The phrase “good debt” may seem like an oxymoron at first glance, but it takes money to make money. Acquiring low-interest debt and leveraging it into earnings is considered good debt. Debt that has no profitable upside is considered bad debt, while some debt is downright toxic.
Turning Good Debt Into Great Success
In a perfect world, you’d have rich friends to loan you interest-free money. That’s the best debt of all. The reality for most of us isn’t quite this ideal, but there’s still a lot of low-interest debt out there to be had. Good debt is debt that can be turned into profits that outweigh the amount you pay in interest.
Most home loans are considered good debt. The key is to buy a house that will appreciate in value. By the time you pay off the mortgage, you’ll hopefully have a house that’s worth more than the amount you paid for it. College loans can also be considered good debt if you’re able to make more money with the degree you earn.
Bad Debt: The House Always Wins
Bad debt includes loans with high interest rates, especially when you use them to buy things that lose value. High-interest personal loans fall into this category. Taking one out to go on a vacation is never a positive financial decision.
High-interest rate credit cards are another example of bad debt. They can turn into a money pit if you can’t pay them off at the end of each month. Avoid auto loans that take years to pay back. Unless you need a vehicle for work, cars tend to depreciate in value pretty rapidly.
Toxic Debt: Financial Kryptonite
Payday loans might as well have the mark of the devil stamped on them. Avoid any loan that doesn’t require a credit check like the plague. APRs on loans like these can exceed 36%!