At some point in your life, you are likely to get into debt. It can be for any reason and purpose. Some argue that there is good and bad debt. This is meant to help you choose wisely when it comes to the kind of debt you will have. However, I have been curious to find out; is there debt that is not inherently bad?
This article aims are looking at debt and how you can decide whether a debt is good or bad.
Debt is part of the larger conversation about personal finances. In business, debt also plays a role as a source of funding for business operations or growth.
You would need to think strategically and look at the value you get from securing debt to achieve your objectives.
If you are to talk to experts, you will be told of bad debt being consumer-driven while good debt as the kind that helps you to build more wealth.
Is there debt that is not inherently bad?
To answer this question means looking at the debts that are considered good.
There is debt that is not inherently bad and that is what you would refer to as good debt.
This is the kind of debt that helps you build wealth, meaning it is productive. You are going to create more value, wealth for yourself or business by incurring this kind of debt.
I am going to look at some of the examples of good debt that you can have. These are the kind of debts not inherently bad.
So, yes, there are debts that are not inherently bad and include student loans, mortgages and business growth debts among others.
Is debt always bad?
If you are trying to figure out whether debt is always bad or not, you should do research.
When I think about debt, I look at different factors to determine if debt is bad or good.
Is debt always bad?
I do not think that debt is always bad. Some of the debt you incur is actually good.
It is common that most people view debt primarily as a bad thing. However, there are times when debt can be of great value to your investments or personal finances.
In his book, The Value of Debt in Building Wealth, Thomas J. Anderson argues that as a consumer, you should not look at debt as a burden, but rather you should consider it as a means of buying assets and reducing your tax bills.
In his proposals, Anderson argues that using debt to finance investments is going to provide you higher returns than investments that are funded entirely with cash.
What is considered a bad debt?
A key aspect of any kind of a debt is the financial goal to which the debt will go towards.
It is important that you consider whether the debt will help you to reach that financial goal, or if ti will drive you further away from your financial objective.
I would argue that a bad debt is that which makes it difficult for you to reach your financial goals.
In business, a bad debt would be considered as the debt that cannot be collected.
When you look into the banking sector, you will find that banks make provisions for the non-performing debts or loans. In some cases, a bank or a financial lending institution will write-off debts that are deemed un-collectable.
That which cannot be collected is defined as a bad loan or debt.
In you daily life, you should be careful not to have debt that will make your financial goals unattainable.
Any debt that makes life difficult for you, whether from a financial obligations or health point of view is a bad debt. You should avoid such debt obligations.
Is there such a thing as good debt?
The simple answer is that there is such a thing as good debt.
But what would be considered a good debt?
According to financial advisors, a good debt is the debt that helps you to grow your wealth or that increases your net worth.
This means that the debt is good when it helps to improve your standard of living by generating a positive return.
Therefore, good debt is defined as money owed for things that can help build wealth or increase your income over time, such as student loans, mortgages or a business loan.
Is a mortgage bad or good debt?
As you try to learn whether a mortgage is a good or bad debt, it is important to know what a mortgage is.
A mortgage is a basically an agreement between you and a lending institution. This agreement gives your lender the right to take your property if you fail to repay the money you have borrowed plus interest.
The idea behind a mortgage is to have a loan to buy a home. You can also borrow money against the value of the house or home you already own.
In simple terms, a mortgage is a loan, provided by a home loan lender or bank. This loan helps you to buy a home or property.
One of the reasons why a mortgage is considered a good debt is that housing is a basic need. This means this debt is not inherently bad. You can use it.
You, and millions of other across the world require a place to live. Your home is very important, and buying a home or the house you will live in is a critical financial undertaking.
Mortgage is also a good debt because it is cheap financing and your monthly payments are going towards paying off an asset that is increasing in value.
Related: 17 Practical Tips on How to Spend Your Salary Wisely
Great Recession and Subprime Mortgage Crisis
Mortgage debt historically has been considered one of the safest forms of good debt, since your monthly payments eventually build equity in your home.
However, as the Great Recession and subprime mortgage crisis taught us, prices don’t always rise indefinitely. You might have learnt that borrowing more than you can afford or using mortgage terms you don’t fully understand, such as adjustable rate mortgages, also known as ARMs, can pose a significant risk.
During the subprime mortgage crisis, millions of borrowers lost their homes to foreclosure as home prices dropped and ARM loan payments adjusted upward.
Mortgages still remain one of the most accessible ways for millions of Americans to build a relatively safe investment in the form of home equity, but it requires an understanding of how much one can borrow, as well as a solid grasp of the home market at the time you buy.
Find a mortgage payment level that works for your household long term, factoring in the possibility of layoffs, a larger family or any other number of events that can affect your available income in the future.
Is no debt a good thing?
You might be considering having no debt at all.
I would argue that this is a decision you need to make, based on your current situation.
If you are the kind of a person who feels stressed when in debt, then maybe having no debt is a good thing.
However, you should be aware of the opportunity cost or rather the benefits you are foregoing by not using debt as leverage to grow your asset base.
There are a number of people who have set goals to clear all the outstanding debts.
This is a financial choice or decision that is considered good. There are many ways in which you can use to get out of debt
Examples of Good and Bad Debts
Here are a few examples of good and bad debts
Good Debt Examples
As you try to figure out if there is debt that is not inherently bad, you should consider the following examples of good debt.
Business or Investment Loan
If you are an entrepreneur or would want to start and grow your business, it might be prudent to get a business loan.
Debt used to increase your business capacity, and increase future cash flow is considered as a good debt.
You can use a small business loan to cover the expenses of expanding your business, offset inventory costs, to support your regular operational costs so your business can stay afloat during tough times, to buy equipment that will boost your business, or even to improve the terms on a larger loan.
Student debt is sometimes a necessity if you wish to fund your college or university education.
The idea is to be able to understand your education program, and know the potential earning power for your career choice. This would help you to take up student debt you will be able to pay.
However, because education improves your skills, you should consider it a good investment that can benefit from a student debt.
Bad Debt Examples
Like I mentioned earlier in this article, bad debts are those that stop you from achieving your financial goals. As part of trying to understand if there is debt that is not inherently bad, you should look out for some of the bad debts out there.
Examples of these include debts with high or variable interest rates, especially when used for discretionary expenses or things that lose value over time.
It is also common to have a bad debt that actually started as good debt. For example, a high-interest credit card that builds up making it tough for you to settle.
High interest rates, such as those greater than 20%, can make your debts more expensive.
Personal Loans for Discretionary Purchases
Taking on debt for expenses like a vacation or new clothes can be an expensive habit.
Payday loans are a bad debt that can turn toxic: They often come with interest rates as high as 300% that can make them immediately un-affordable.
These are short-term, small-amount loans that you can settle with your next pay check.
In conclusion, you should be able to seek financial advice on what constitutes good or bad debt.
However, it is possible that you already know your financial situation when it comes to debt exposure.
Your relationship with debt is going to contribute in a big way to your success in achieving financial goals.
If you have been wondering if there is debt that is not inherently bad, I hope this article has been helpful.
Yes, there are good debts and you should understand how they work. Use good debt to grow your assets and wealth.