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The difference between good debt and bad debt

by , 29 October 2014

Is there such as a thing as good debt? While some people consider that all debt is bad, the truth is that not all debt is created equal. Some types of debt are worse than others.

While some things are worth getting into debt for, others are not.
What type of debt is considered good?

 Good debt refers to long-term debt that usually pays off in the long run. It helps you generate income and increases your net worth.

Here are some common examples of good debt.
 
Student loans
 
A student loan is considered to be good debt because it increases your chances of finding a high-paying job in the future. Investing in higher education definitely pays off over the course of a lifetime.
 
Small business funding
 
Taking out a loan to develop your own business is another type of good debt, provided that your business takes off and becomes profitable. The return on investment is huge if your business is a success.
 
Mortgage
 
If you can’t afford to buy a home, taking out a mortgage is a good debt because you are gaining a huge financial asset. You can buy a house, live in it for a few years or decades, then sell it and actually make a profit. You can also generate passive income by leasing it.
 
Bad debt is the type of debt that doesn’t provide any real benefits, causing only financial instability. Bad debt includes all debt that is used to buy depreciating assets.
 
Here are some common examples of bad debt.
 
Cars
 
Vehicles lose value the moment they are purchased. You end up paying much more than the car was worth in the first place.
 
Holidays
 
Borrowing money to afford an expensive trip is not a good idea. It’s better to save money until you can afford to pay it in cash.
 
Goods and services
 
Clothes, groceries, gadgets, as well as other goods and services are not worth getting into debt for. You will pay double the amount they are worth and will therefore waste money that could have gone into savings.
 
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The difference between good debt and bad debt
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