How to Tell Good Debt from Bad Debt

Often debt is split into two types; good and bad. Some people feel all debt is bad and that it should be avoided and others feel that debt is fine and there is no such thing as bed debt. However, it is worth understanding more about the different types of debt and why they are categorised as good or bad.

Sometimes it is quite easy to decide whether a debt might be seen as good or bad. If you borrow money to buy a house, then the house value increases and so by the time you pay the debt back, the value of the house has risen by more than the cost of the interest, then this would be good debt as it was more like an investment. If someone borrows money to pay for an expensive sports car, when they have a good car already and they cannot afford the repayments, then this could be considered as bad debt. However, it is not usually so easy to classify other types of debt.

Some people feel that if you have spent time considering whether the loan is a good idea, calculated which the cheapest and if you can afford the repayments, then it is a good debt. It has been well considered and it is affordable. However, other people would only see a debt as good if it paid for something that improved you finances, such as a mortgage, student loan or a car to drive to a better paid job.

Debt is often a much more personal decision though. It is easy for someone to say they would not borrow money in a certain situation but there are lots personal reasons why we choose to have debt or not to have debt and equally these can cause us not to be wise with our borrowing. For example some people are prepared to take a risk and will be happy to borrow high amounts of money and only just be able to make the repayments, but if interest rates increase or their expenses rise or salary falls, they will not be able to pay it back. Some people do not like the idea of being in debt at all and constantly feel the burden of it hanging over them. This can mean that they will avoid debt, when they could be better off if they use it. Some people know that they can be irresponsible with their spending and so decide to avoid any sort of debt and others know they are self-disciplined and so are prepared to have some debt as they know that they will pay it back.

What you want to borrow for can often be the judgement made as to whether the debt is good or bad. If you want to borrow money to buy luxuries then it is normally frowned up and if you want to borrow it for necessities or things that will improve your future finances, then it is considered okay. However, most situations are not that well defined. For example, buying a home should be a good investment but if you buy a property in an area where house prices fall or homes become unsaleable or if you cannot keep up with the repayments and it gets repossessed, then you could lose out. The same with a student loan which should be seen as an investment in your future but if you do not pass the course, drop out early or do not find a good job, could be considered to be wasted.

This is why it is so important to think hard about all forms of borrowing. Make sure that you are confident that you can make the repayments, that you are using the best type of loan, which is the cheapest option for you and that you feel that the borrowing is justified to you. Everyone will differ in their opinion and so you need to make the right decision for you in your own personal situation. Only you know how you feel about debt, how secure your job is, how disciplined you are about repayments and things like that. It needs to be a well-researched, hard thought decision based on you and perhaps your partners income, personality and requirements.

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