What is “Good” Debt?

One of the debates that rages in the world of personal finance is whether or not there is such a thing as “good” debt. Some claim that all debt should be got rid of as soon as possible, no matter the type that it is, while others see some types of debt as more virtuous than others.

What is clear, though, is that society as a whole views some debt as “better” than other types of debt. So what is good debt? While credit card debt is usually frowned upon, and payday loans are considered terrible, there are some types of debt that are considered acceptable, and even necessary. Here are some of the loans that might be thought of as “good” debt:

  • Home Loans: Among all the loans that you could get, home loans are considered necessary by almost everyone. Few people can buy a house without borrowing to make it happen, and home loans are considered very respectable. If you can make regular home loan payments, it goes a long way toward boosting your credit history, and few people will see anything wrong with this type of debt. For those in Australia, Newcastle Permanent is a decent option.
  • Student Loans: With the cost of college rising every year, there are few families that can afford to pay the cost of a higher education outright. As a result, taking out student loans is rarely seen as a poor decision. Like the interest rate for a home loan, the interest rate is usually relatively low for a student loan. And, since you are using the loan for a college education, it is generally thought to be “worth it.”
  • Car Loans: In many cases, consumers aren’t looked down on for getting a car loan. Cars are expensive, and many don’t save up for cars. Besides, a car can provide transportation to a job, and is considered almost a necessity in today’s world.
  • Business Loans: Starting a business is an increasingly popular move. If you need a loan to get started, few people will argue that it is a bad idea. As long as you have a business plan, and are prepared to do well, many agree that a business loan can be a good way to start a worthwhile venture.

While the above types of loans are generally accepted by society, some point out that anytime you pay interest to someone else, or anytime you have an obligation that makes it so that your money and your property aren’t yours, you are causing problems for your finances.

Don’t Get Carried Away

It’s important to realize that just because there are some types of debt that are considered “good,” it doesn’t mean that you can go overboard with your borrowing. If the debt that is considered the best type can be too large.

Remember to keep a sense of proportion as you borrow for the things that you think are more important. Remember that just because a lender approves you for a certain amount, it doesn’t mean that you should borrow that full amount. It might be considered “good” to get a mortgage to buy a home, but that “good” can quickly become “irresponsible” if you get a home that you can’t afford.

Be careful anytime you borrow, even if you believe the debt essential. No matter how “good” the debt is, it still has to be repaid… with interest.

Written by Tom

Tom Drake writes for Stupid Cents and Canadian Finance Blog. Whenever he's not working on his online endeavors, he's either doing his "real job" as a financial analyst or spending time with his wife and two boys.

3 Responses to What is “Good” Debt?

  1. All good points Tom! I’m fighting my way out of ‘good’ debt right now….my mortgage. I hate debt but I made this bed and I have to dig out of it.

    Mark

  2. More like Not As Bad Debt, the phrase “Good” debt is a rationalization or good marketing by banks and lenders, that is all. All Debt should be loathed and hated like a Brother-in-law living in your basement!

  3. I second Big Cajun Man. “Not as bad debt”. My mortgage is next to go. But I must admit, I’ll likely always have a car loan. I like to drive a new car.

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