Good Debt vs Bad Debt ? What’s the difference and is there really good debt? In a nutshell, Yes there is good Debt. Rightly so many of us aspire to live debt free. After all, that would be ideal wouldn’t it? Living life not owing anyone a penny – apart from the monthly bills that cannot be avoided like utilities, food and various insurances – is surely something we should all be striving for isn’t it? Well, it may surprise you to learn that according to most financial experts the answer is no, probably not.
The thing is, you see, is that debt can be divided into two distinct categories; good debt and bad debt. You don’t want bad debt of course but good debt can be exactly what your overall financial ‘health’ needs. But just what qualifies as good debt, and what is considered bad? Let’s take a brief look:
Good Debt vs Bad Debt
Good Debt Examples
Student Loans – Everyone who has to take one out moans about student loans, whether the loan is being assumed by the parents of a student or by the student themselves. But there are definite advantages to taking the loan.
The first, and most obvious, is that they provide the funds needed for a student to get the education they want and need in order to pursue the career they aspire to. As is the case across the world an increasing number of employers in South Africa no longer view a degree as a desirable extra for a candidate to possess but as an absolute must. So if the loan, which should have a lower interest rate attached to it than other loan types, helps a student get that much needed degree certificate then it can only be a good thing.
A student loan can be a great credit builder too. This is especially true of loans taken out by the student themselves, as when young they usually lack the credit to obtain a mortgage, a car loan or even a credit card but by making on time payments on their student loan they can build their ‘credit rep’.
Mortgages – Most people aspire to home ownership and in order to achieve it they need to obtain a mortgage to do so. But again, this is a loan with benefits. For most people their home is not only just a place to hang their hat it’s their biggest asset and when paid off in the proper manner a mortgage can be the biggest credit builder of all.
Investment Instruments – Everyone needs to prepare for that day when they are no longer able – by choice or by circumstance – to work. So while taking on an additional financial obligation in the form of an investment tool of some kind might not seem appealing at first (who needs an extra bill?) but such things are an investment in your future health and happiness, and so it’s a very good debt to have.
Then there is bad debt. Bad debt is generally debt incurred to purchase things that quickly lose their value and do not generate long-term income or provide any tangible benefit. Bad debt is also debt that could have been avoided with better financial planning.
Good Debt vs Bad Bet
Here are some examples:
Credit Card Debt – You were probably told that having a credit card or two is something of a must if you want to build up a stronger credit profile. And that’s broadly true. What is not advised however is carrying credit card debt.
In order for a credit card to help your credit it should be used regularly but the balance should be paid off every month. Running up big credit card debts just because you can is not a good thing and thanks to high interest rates just paying the minimum every month really can put you in debt for the rest of your life.
Payday Loans – This may be the worst kind of voluntary debt you can incur. Certainly they can be very appealing, especially if you find yourself in sudden financial difficulty (your car breaks down and it needs an expensive repair fast or a utility bill is due before your next cheque from work) But these loans are not only loans that carry HUGE interest rates but also loans that can drag you down into a spiral of debt that can be very difficult to get out of and they should be avoided at all costs.
Medical Bills – No one actually plans to become ill or get injured so this is a bad debt that can’t be avoided. Or can it? Ensuring you have adequate healthcare coverage in place will protect you from incurring potentially financially crippling medical debt, even if that does mean adding another expense to your monthly budget.
So there you have a round up of Good Debt vs Bad Debt, it’s fairly simple and getting the balance right will ensure a sound financial future. Want more advice speak to one of our Financial Advisers to find out more.