Good Debt vs Bad Debt

When Good Debt is Bad Debt

There are many financial advisors who have advised long time ago that some debt is seen as "good debt" and some debt is seen as "bad debt".

Here are some examples of bad debt; department store credit card debts, credit cards debt, purchases of expensive "toys" like stereo equipment, a big screen TV, video cameras, boats, and so on. It never makes sense to go in to debt for anything which you actually can't afford and starts to lose value the minute that you purchase it. The interest for those things will be so high that you technically have to pay 20 or 30 percent more than the purchase price. You will need years to pay off to the point where the products probably broke or are obsolete while you are still have to pay it off. It's not a necessity at all.

To borrow a condo or a house, money to pay off a college education, or a car, however, most financial advisors consider that is good debt.

A car is often essential in order to get to work or school. In many parts of America it's very hard to function without a vehicle. Even though cars lose value, but car loans generally come with lower interest than credit-card loans because they are "secured debt", and vehicles still maintain some value even when they get older.

At the moment houses and condos are going down in value but historically in the long run their value will appreciate. They are often good investments, if you plan on staying for five years or more,

And a college student education pays itself back many times over. Because good college graduates can bring in higher salaries and advance further in their careers.

However, here are a few examples when this seeming good debt becomes actually bad debt:

It is never a good idea to buy more house than you need. Smaller houses cost less to maintain, use less energy, and, needless to say, are generally less expensive. The crashing real estate market has learned us all that purchasing a home that you can hardly afford, on the assumption that you are able to sell it for a profit within a short period, is never a safe option. And having an adjustable mortgage rate is in almost any case bad debt.

The same applies to car loans. It's advisable to do a proper research, purchase a vehicle that keeps its value, and purchase for value and for whatever your demands are, not for style and looks.

As for personal student education loans, while state universities and community colleges are a great bargain, think twice before you pay for a "career college". Usually you have to pay much more for the same education than you need to pay for community colleges and state universities. And often they have much lower job placement rates for their graduates than for a conventional degree.

So think twice before you get into any kind of new debt and have a plan how much that debt will actually cost you and what you are able to get out of it.