Is There a Difference Between Good Debt and Bad Debt?
In asking the age old question, what is good debt and what is bad debt, one quick answer is, debt is debt. Period.
However, there are some areas or forms of debt that may be considered better than others,
One question to ask yourself in determining good debt or bad debt, is this worth borrowing money and being in debt?
Is it worth taking out a loan for a holiday and being in debt?
Is it worth taking out a loan for a wedding and being in debt?
What is the value to you of what you are purchasing or getting, against the idea of being in debt?
Another question to ask yourself is, by going into debt, am I going to better myself in the long run? Will I come out financially better on the other side?
So let’s look more into this good vs bad debt question.
Examples of What Some May Feel is Bad Debt
Credit Cards: Credit cards serve a purpose, and for many a good one, they are there to use if you have an emergency. They also can carry a higher than usual interest rate. Which if you do not carry a balance on the card, is good, no interest to pay.
Credit cards, while they may be considered bad debt, are really more of a not so good form of debt. If used properly, credit cards can work for us.
Personal Loans: Personal loans that are unsecured, can also carry a higher interest rate then secured loans. The question with personal loans is, what is the loan for? Can you save up for the item or service in question without going into debt.
Payday Loans: Payday loans and doorstep loans carry a very high APR or annual percentage rate. These are supposed to be short-term loans, and they are also for those with bad or poor credit.
The higher the risk to the lender, the higher the interest rate.
A common thread with these loans is that they all come with high interest rates. Even personal loans will carry a higher interest rate then a secured loan.
Examples of Good Debt
Mortgages: Taking out a mortgage will in all probability be the largest loan or debt you ever have.
If you purchase a property for £150,000, even with a 20% deposit of £30,000, you ill still require a mortgage of £120,000.
Why is a mortgage loan considered good debt?
It is in the hopes, and history has shown, that properties appreciate in value. Meaning they go up in value.
The £150,000 house you bought and needed a £120,000 mortgage, over time may be worth £175,000 or more. This while the mortgage balance goes down as you make payments. This is building equity.
Years later that equity can be a nest egg you may use by selling the property, or doing a reverse mortgage to access that equity.
Can properties decrease in value? Yes. That would then make your mortgage bad debt.
Student Loans: Universities are charging £9,000 a year for Uni fees. Most degrees are a three (3) year term, so say £27,000 in student loans for a degree. And that is before housing, food, books, transportation, and a social life.
However, university graduates on the whole earn more money annually, so student loan are an investment of debt in the hopes your future is brighter.
In addition, you do not begin to repay the student loans until you earn over £27,295 a year, and then if you do earn over this threshold, you pay 9% of the amount over the threshold in student loan payments.
An example would be:
You earn £30,000 a year. This is £2,705 over the £27,295 threshold, so 9% of £2,705 is, £243.45, or £20.28 a month in student loan payments.
For some they may stay in debt for the student loans for much of their life, until they are written off usually 25 years after they were first to be repaid.
As long as you don’t mind seeing statements showing you tens of thousands of pounds in debt, this can be considered good debt.
Career Education: This is similar to student loans, taking out a loan to learn a new trade, or better oneself in the trade they are currently in. Moving up the ladder.
However, many employers will help employees in learning more, and some will pay for it.
Investing in a Business: This can be a grey area.
You want to start a business, be your own boss, walk the path of being an entrepreneur, and maybe getting rich along the way.
It is considered good debt, if your business succeeds, but could be bad debt if it fails.
The debate on good debt vs bad debt will always continue.
And the reality is, debt is debt….unless you come out the other side out of debt, and better off.