When it comes to the word debt, most people have a scary image of bailiffs banging down the door to collect, or the thought of being shackled and tied down to a company or bank. However, debt itself isn’t bad, it’s the reasons why you take out a loan that can determine whether the debt is bad or not!
The main thing that makes a loan a good debt, is if the loan is taken out for something that will either increase in value, help to generate new revenue or make good financial sense against your current situation. This way the loan pays for itself in the long run and enables you to take a step up financially that you otherwise would have had to save for months or even years for.
The best example for this is taking out a loan to help you start up a new business. Taking out a loan for a new (well thought out and researched!) business is a good debt to have, especially if it is to help pay for marketing or new staff or even for you to go full-time on the idea. This will help you build up a cash generating source that will pay for the loan and then some with a little work!
Another good example of good debt is a student loan. As long as the subject is one you have a passion for and want to spend your life doing! Having a college education will help improve your value as an employee with a better, larger skillset and will improve your future income. Student loans often have very little interest as well, so are one of the best debts you can have in your lifetime!
If you’re taking out a mortgage for your home, again, good debt! In the vast majority of cases, mortgages will have fairly low interest rates and long life for a loan and so won’t break the bank too much. At the same time, homes and land very often gain more value over the course of the mortgage than you’ve paid back in interest, so your home has paid for the mortgage by just existing.
So far these are all examples of loans that help you generate more income, but there are other types of good debt too. If you need a new car, especially if it’s to help you with your business, it’s also a good idea to take out a loan to pay for the entire car upfront. As automobiles lose value over time, paying for the car in a lump sum at the beginning means you aren’t paying out further interest on an asset that is already losing value. That means, month on month, you’ll paying more for something that’s worth less.
There’s also the case of low interest loans such as those that have a low interest rate. Often home equity loans will be an example. If you have a few different loans with varying interest rates, an example of good debt could be taking out a home equity loan to pay them all off and just pay that back at a lower interest than the old loans combined. This way you save money month on month while not gaining any new debt!
In general, when thinking about taking a loan, the question you should ask yourself is “Will this loan to make my financial situation better in the long run?” If the answer is yes, then it’ll be a good debt to have!