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Good Debt and Bad Debt – What’s My Take?

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Have you ever been heard the terms “good debt” and “bad debt“? When I was pursuing my finance degree, these terms were thrown around in nearly every class. We, as students, were being trained to be the future financial leaders of America, and in order to do so effectively, we needed to understand the difference between good debt and bad debt.

Debt in General

I’m sure we all know what debt is, but let’s review just to make sure we’re on the same page. When one borrows funds in order to attain an object or service, that person is in debt to the lender, often for more money than what was initially borrowed – this is due to the interest.

Unless you’re borrowing money from your mommy and daddy, chances are that you’re going to have to pay back your debts with interest. If you borrowed $100,000 at a 4.5% interest rate for 30 years, you would pay about $83,000 in interest! That means that you borrowed $100,000, but you ended up paying back $183,000 to settle the loan.

Bad Debt

Most of the time, when someone borrows money to attain a depreciating asset, this is called “bad debt”.

The best example of bad debt is purchasing a brand new vehicle on credit. You’ll purchase your $20,000 car for $25,000 after 5 years, but at that time, it will only be worth about $7,000.

You see, the value of a car almost never goes up! Parts begin to wear and repairs become mandatory. The car slowly nears the end of it’s life and eventually becomes worthless. A possession like this should never be financed!

Good Debt

Obviously, good debt is the opposite of bad debt. When one borrows money and earns more with it than what they owe in interest, this is when debt is considered to be “good debt”.

In other words, let’s say someone decides to start a detailing business and borrows $10,000 in order to get all of the necessary supplies. If, after a few years, the business is valued at over $50,000 and the loan amount totalled to only $20,000 after interest, this investment would have been a considered a success and the debt would have been “good debt”.

My Take On Good Debt and Bad Debt

My wife and I both came out of school with college debt (which would techically be considered “good debt”). It didn’t seem like a big deal until the bills started coming in the mail and we didn’t have the cash flow to keep up with them. Rather than increasing our savings, every month was slowly eroding them.

In order to combat the debt repayment, we decided to drastically cut our spending and make every effort to make more money. Luckily, we were successful and didn’t default on any of our loans. In fact, by combating our debts head-on, we were able to pay off $24,000 worth of debt in 14 months!

Without debt, cash flow is easy. Large sums of money can be saved up in a matter or weeks and everything suddenly seems affordable without asking the bank for permission to use their money.

I don’t believe there is such a thing as good debt or bad debt. Debt is debt, and it increases the risk of financial disaster. Avoid debt and your savings will go up, while your stress level will go down. Business ventures will suddenly become easy and profit will soar through the roof. All because you avoided debt.

What is your take on good debt and bad debt? Do you agree with the terms? I’d love to hear your comments!

Get Out of Debt Money

AUTHOR Derek

My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.

44 Comments

  1. I certainly feel that the terms can be a misnomer. If you can’t really afford the debt, it is all bad. There are some who find themselves paying for an education which has not contributed to their income either because they didn’t finish or couldn’t find a job.

    • I always like the way you think CFM. If someone doesn’t have the money, so decides to go into debt, typically, the outcome is far from good….. A handful of people make it work, but for most, it’s only self-destruction.

      • Amen, brother!

        Some make debt work and survive throughout. Yet sadly there are too many who’ve gotten burned in the process.

        My take is the same as CFM, all debt is bad debt.

  2. Good debt is debt that will be used to increase assets more than you pay back (decreasing assets).

    College debt – good if it’s in a degree that will make more money than you would alternatively make without the degree. debt for an Engineering degree is good, debt for an Anthropology degree is bad.

    Home mortgage – depends on the alternatives available. A house is not a good investment, but if renting until you have enough to purchase a house outright is significantly more expensive, then it’s a necessary evil. I don’t consider shelter as optional, although most buy houses that are far too large.

    Business debt – depends on whether it’s successful in making more money. Personally I avoid business debt and only invest in my business with cash.

    All other debt is bad debt.

    • Thanks for the input BNL! It sounds like we’re basically on the same page.

  3. I know these some very important hints that every person has t0 take to keep the balances of life and the important debts to enable us to lead a peaceful finance pleasure is also important. I just loved the balance on this article.

    • Thanks Leonor! I try to keep my articles balanced, and then provide my two cents on the topic. In the next 4 years, I hope to be completely debt free and never have to ask for money ever again!

  4. I’m not really sure that I can see the distinction between good and bad debts. Once you eliminate all debts, saving money to start a business (or for other goals) wont take that long. I Agree with BNL that most debt is bad, but I’d be willing to take on debt for a home, and for education for some degrees, but not all.

    • Really, if I had a chance to go back and do it all over again, I wouldn’t accumulate any debt for college, but I might still take out a loan for the house. Everything I borrow will be paid back ASAP though.

  5. It is simplistic to think about debt as good or bad. First you need to define debt. Is a mortgage really debt, in the most common way of thinking? Or is it an investment? Is borrowing for college debt? What if you get a job making $100k a year and pay it off quick? What is you don’t get a job? Does the outcome even matter?

    • Yes, a mortgage is debt, and yes, borrowing for college is debt. Both of them take quite a long time to pay back, even if you do end up making a lot of money. Regardless of the outcome, debt almost always holds you back from your picture perfect life.

      I already paid off my college debt, and it feels amazing! Next, I’m going to pay off the mortgage debt in a hurry! After that, it’s going to be a party! 🙂

  6. All debt enslaves you. If you think being a slave is bad, then it’s bad.

    • I like how you put that Emily! Simple, to the point, and 100% true. I know I’d rather not be a slave.

  7. Debt for fast consumption is my definition of Bad Debt. You shouldn’t borrow for longer than the item lasts. For example, a car loan, payable in 3 or 4 years, is fine. The car will probably last a lot longer, so no problem. Buying lunch or a vacation on a credit card that you won’t pay off at the end of the month is bad debt.

    Debt for making money is totally different. It’s not even in the same league as personal debt for consumption. Everyone knows it takes money to make money. You can either invest your own cash and time, or someone else’s. Oftentimes it is much cheaper to use someone else’s in the form of debt. It is usually bad business to use exclusively your own money and time to make money … yes it might be safer but so is staying in your house versus travelling.

    • I don’t quite agree with you Alex. A car loan is one of the worst forms of debt I can think of. I wouldn’t ever pay $25,000 for an $8,000 car otherwise, but suddenly it becomes ok when I do it a little bit at a time.

      As for the phrase, “It takes money to make money”, I don’t think that’s entirely true either. I started this blog for $44 about a year ago. Since then, I have earned somewhere around $5,000! And, next year, I’m hoping to up that amount to $40,000. It certainly didn’t take money to make money in my scenario.

      I really do appreciate a difference of opinion though! It’s fun to hear other viewpoints other than my own. Thanks for the comment! 🙂

  8. Normally, good debt is mortgages and education debt because they appreciate over time. It might be a good reason to take out the loans, but it will prevent you from some choices. When my daughter got her first mortgage, I made sure the payment was appropriate for her income. That was nearly 7 years ago. She has refinanced twice since keeping the payment lower than before. In the meantime, her income has more than doubled. This is true of all debt, keep as low as possible!

    • As always, I agree with you krantcents. My wife and I have lived the same way so far – taking out as little debt as possible. We recently purchased a fixer-upper and will have a house that’s worth much more than we paid for it! Plus, we’ll be able to pay off the loan in less than 4 years. Love it! 🙂

  9. Good or bad, debt is a pain in the butt and I’d just as soon not have any at all. If I knew what I was getting myself into when I was a tad younger, I would have passed on the school loans and the house and just saved anything and everything I could. I could have gotten by going to a community college and paying for it myself as I went. I’ll be paying these loans for another 10 years at least.

    • Debt really is a pain in the butt isn’t it!? I’m glad I kept my school loans to a minimum, it would have been much more fun to graduate debt-free though! Good luck paying yours off. I bet you can do it sooner than you think!

  10. I agree there is little distinction between good debt and bad debt. I was lucky to graduate college debt-free! In fact, I am a year and a half from finishing Graduate school debt free as well! Many of my friends who went full-time in grad school finished with 50K+ in debt. I took a different route. I decided to work full time and take an extra year to finish my masters in order to graduate with no debt. I think I took the better route. Not only do I have valuable work experience, but no debt. (I doubt many of my friends could pay of the 50K in debt that year they got by finishing earlier than me).

    • Sounds like you did it perfectly 20s Finance! Like you said, you have your grad degree AND experience. That is HUGE!!! With both of those factors, you will most likely advance well beyond your friends. Good luck to you and your future! Keep me posted! 🙂

  11. I like your thoughts that debt is debt. I also wish I had seen this in college worked to pay as I went!

    • There are plenty of young kids that I need to reach with my message. If I can save them from incurring college debt, they’ll have so many more options in their future! Thanks for that added motivation! 🙂

  12. I do believe in the use of debt as leverage. We had a simulation senior semester where we had to pretend we were running a corporation. I tried to run it with no debt and I did not generate as much revenue as my classmates. I also lost points because my leverage ratio was too low. I learned that properly managed debt can propel you into more income as long as it is used to purchase income generating assets.

    • Debt can be used to increase your earnings in business….as long as the conditions are right. But, sometimes it’s better to be save and live on a cash-only plan. You can still advance your earnings, and with much less risk.

      I guess I’m just old fashioned… 😉

  13. Yes, if you have no debt, it’s amazing how much freedom (financially) you really have… which has led some to believe all debt is bad. They might suggest we simply need to live within our needs. Yet, I remember having the option of getting a small mortgage for my own condo or pay more than my mortgage in rent. I bought the condo… and sold it for slightly more than I bought it for a couple years later. I consider this good debt… and a reason why the “all debt is bad debt” just doesn’t fly with me.

    • The issue is, you probably updated items in the house, repaired some things, and paid interest on the loan. The amount you made was most likely very minimal, or you may have actually lost money. I’m almost to the point where I’m saying all debt is bad debt.

  14. I know I agree with Derek, these kind of petty expenses may not be a good savings nor a bad expenditure. But they are not countable as well. I know these kind of expenditure are petty debts needs to be taken care well.

    • In my opinion, debt of any kind should get paid off as soon as possible! I’m glad you agree.

  15. I’m with you on the “debt is debt” thing. If someone chooses to go into debt for something, I think it’s more important for them to understand that ALL debt is risky, and that they’re giving up something to take on that debt (opportunity cost).

    • Yep! Exactly right Jackie! Debt is incredibly risky, and if things don’t go just right, the rest of your life could be miserable.

  16. “You have to spend money to make money.” That’s how I view good debt.

    • Sometimes this is true, but I started this website with practically nothing, and it’s turning into a huge money maker! In my case, it just took some time to make money!

  17. It’s so easy to say that business debt is good debt, because it will make you money. Or mortgage debt is good debt because it’s an investment. But what if the business fails, which many of them do? And we now know how the “real estate always appreciates” theory is working out.

    If I had it to do over again, I would only borrow for a house and I would have paid that mortgage off as quickly as possible.

    • My thoughts exactly! This is how my wife and I are going to do it. Give us 3 or 4 years, and we’ll have our mortgage paid off.

  18. I’m inclined to think all debt is bad, as well. Student loans are starting to get on that bad debt list, as well. At least in my opinion. If you’re borrowing money to go to school and then can’t find a job with your degree after…it’s great that you invested in yourself, but did the education really pay off? That being said, I’m all about perpetually learning and going to school at any age for any reason if you can afford it.
    Good debt? Maybe to build credit? So someday you can buy a house?

  19. Wonderful article Derek! I do feel debt is a debt. Its us who make a debt bad or good. I go in to debt every month by using my credit card, but I pay off before the pay date. I go in to debt to earn reward.

  20. You asked a great question, and from all the responses, good debt/bad debt is a hot button topic! I know people with no debt and some with massive debt, and I can say that I only want to be in the first category. When I had debt, it was like a black cloud following me around and I will do anything I can to avoid it in the future. I’d like to know what your thoughts are on buying vs. renting, when you aren’t sure if you want to commit to living in one location for more than two or three years?

    • I know what you mean! When I was in debt, I definitely didn’t feel myself. That ‘black cloud’ statement hits the nail on the head! It’s really a low feeling.

      If I were going to move every 2-3 years (out of the area), I would rent 100% of the time. Owning a house just doesn’t pay when you’re moving all the time, and it’s certainly not a liquid asset, so when you move, you’ll most likely have to cut the price just so you can sell it in time! Renting really doesn’t cost that much more than buying, as long as you find a good deal.

  21. Wonderful article Derek! I do feel debt is a debt. Its us who make a debt bad or good.


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