Not all debt is bad. There are good types of debt too. Naturally in an ideal world we would not have debt of any sort, but do not assume that any form of borrowing is bad. It is not. We took a look at what may count as good debt.
Good Types Of Debt – The Definition.
Quite simply, good debt is one that is a sensible investment in your financial future. It is a sensible taking of credit, for the right reasons. A practical use of credit facilities. One that should leave you better off in the long-term and not leave you crippled with debt, struggling to make repayments, or cost you a lot financially in extra fees and interest charges.
Why You Take On Good Debt
You will have a clear and specific reason for taking it out, and a realistic plan for paying it back that allows you to clear the debt as quickly as possible, or in a series of regular and affordable payments (eg for a mortgage). Someone with a good debt will also have identified the cheapest possible way of borrowing that money.
Good Types Of Debt – Methods
They’ll have done this by finding the borrowing method, an interest rate, loan or credit amount, term and charges that are the most appropriate for them. In some cases, it will mean a deal with the lowest possible interest rate, but in others, it might not. For example, if the lowest rate comes with the price of high charges or penalties.
Examples of good debt
Here are some examples of how taking on debt could actually make you better off in the long run:
- Student loan: taking out a student loan to pay for university will help you become a graduate. This is a good investment because university graduates typically get paid more than non-graduates and, more importantly, because the interest rate is relatively low and you only have to repay the loan once you’re earning more than a certain amount.
- Mortgage: a mortgage can be a good debt because it will enable you to purchase a home to live in. Once that mortgage is paid off, that home will be a big financial asset, which is likely to grow in value over time and the monthly mortgage payments could be cheaper than rent.
- Investing in a business: a loan to help you develop your own business can also be a good debt. This is true as long as you have a sensible and realistic business plan. If your business does well it will end up being worth far more than the loan you originally took out.
- Buying a car you can afford: if it is essential to enable you to get to work and earn a living. However, it’s important that you can afford the loan repayment costs and the running costs of the car out of your income.
Conclusion
There are many types of debt, some of which can cripple those that borrow. Some help people get on in life and are a huge support. So if you think you need to borrow, consider whether it makes sense for you to do so. Consider the costs and whether you will be better off once the debt is paid off.
