Is There Such a Thing as Good Debt?
We live in a world where everybody wants access to credit, but nobody wants to owe their soul to the bank. However, there are certain types of debt that can actually be advantageous to us over time. The challenge lies in distinguishing good debt from bad debt, and managing your good debt shrewdly.
Good debt is debt that we acquire for something that will increase in value and improve our lives in some way. For this reason, good debts are essentially an investment in our futures. Bad debts, on the other hand, are debts that we acquire for something that will decline in value and doesn’t contribute any real benefit to our lives over the long-term.
There are certain types of debt that are regarded as good debts like business loans, student loans, mortgages, and investment property loans. But they could possibly turn into bad debts if the circumstances aren’t suitable. It’s extremely important to keep in mind that absolutely nothing is absolute or guaranteed to manifest as a good debt because market conditions, interest rates, and numerous other variables can change over time.
Business loans are considered good debts because they are an investment in your potential as a business owner. Borrowing money to invest in your dream is a solid investment because no one will work harder to help your business grow than you will. As your business grows, it will hopefully, eventually become worth considerably more than the original loan.
Nevertheless, for a business loan to become a good investment, you will want a compelling business plan, an exceptional product or service, and a substantial level of dedication. If you’re lacking in any one of those areas, the business might not survive, let alone thrive. Occasionally whether a business survives has nothing to do with any of those factors. Sometimes it all depends upon the marketplace and luck, both of which you have no control over.
A college diploma or university degree is frequently regarded as a good debt because it’s an investment in your future. Individuals with diplomas or degrees are more employable than their counterparts without a post-secondary education, and typically earn much higher salaries.
However, there are instances where a shortage of demand for certain professions exists. In some instances there are a great number of students graduating and not enough positions for them to fill, such as with the current teacher situation in Ontario. In those sorts of scenarios, either relocation or accepting a position in a field other than your area of study sometimes becomes necessary.
Mortgages are good debts because a house is a solid investment. Houses have a tendency to increase in value throughout the years, and interest rates for mortgages are generally low compared to other types of loans. Whenever you rent a house you have to pay month after month with no possibility of ever getting anything out of the deal, but after you finish paying off a mortgage you will own the home outright and you won’t need to pay any more money.
With that in mind, mortgages can sometimes become bad debts. When people purchase a home the plan is for the home to increase in value, but occasionally the opposite occurs. Sometimes a community will turn undesirable with time, or something gets constructed in close proximity to the property that triggers property values to decline.
Frequently people purchase real estate as investment or rental property so that they can earn money from their investment, which is a good debt. Usually the rent paid by the tenant, or tenants, covers the mortgage payment or a large portion of the mortgage payment.
Regrettably, a large percentage of tenants don’t take very good care of the properties that they rent, and in several cases have caused excessive damage to rental properties. This can cause the property value to depreciate, and cost the home owner thousands of dollars in repairs.
The important thing to remember is the fact that although there is such a thing as good debt, good debt has the ability to turn into bad debt. Another factor to take into consideration is that just like with anything else, too much of a good thing is bad for you. When you’re contemplating taking on a good debt, make sure you aren’t overextending yourself and can afford to make your payments comfortably. Never borrow more than you need because there are no guarantees, even with good debt.
For more information on debt, check out our learning center.