Good debt vs Bad debt
14 Apr 2023
Good debt and bad debt refer to the characteristics of different types of debt and how they impact an individual’s financial situation.
Good debt is debt that is considered to be beneficial to the borrower in the long term. This type of debt is typically used to make investments or make purchases that will generate income or appreciate in value over time. Examples of good debt include:
- Mortgages on owner-occupied homes
- Student loans for education leading to higher earning potential
- Business loans to expand a profitable business
Bad debt, on the other hand, is debt that is considered to be detrimental to the borrower in the long term. This type of debt is typically used to make purchases that do not generate income or appreciate in value over time. Examples of bad debt include:
- Credit card debt for consumption
- Personal loans for luxury vacations
- Car loans for expensive cars that lose value quickly
It’s important to note that the line between good debt and bad debt is not always clear and it depends on one’s personal situation and financial goals. For example, a mortgage on a rental property may be considered good debt if it generates income, while a mortgage on a vacation home may be considered bad debt if it does not generate income.
It’s important to keep track of your debt, understand the terms of your loans, and make sure you can afford the payments. It’s also important to have a plan to pay off your debt, prioritize your debts, and make sure you are making progress towards paying off your debts.