Target Debt Free

Difference Between Good and Bad Debt

Is there such a thing as good debt?icons_2008009542-1113int-icons_magnifyingglass

I don’t think so, but there are a lot of people that will argue that there is a difference between good debt and bad debt. To be fair, we will explore that argument. In the end, all debt is…well, just read to find out.

Is secured debt the bad debt?icons_2008009542-1113int-icons_x

Not really. Do you know the difference between secured debt and unsecured debt?

Secured debt is when you have borrowed money, the loan is tied to something tangible. Examples include car loans, mortgages, and home equity loans. If you do not pay the debt, something can get taken from you.

Unsecured debt is the exact opposite. This is when you borrow money from someone and the loan is not tied to anything. Examples include credit cards, student loans, and lines of credit.

Well, then what is bad debt?icons_2008009542-1113int-icons_donotenter

Some would argue that bad debt* is when you have borrowed money for something you did not really need. A lot of families get into this situation when they start to buy “toys” like boats, RV’s, motorcycles, and expensive cars. These families look at the monthly payment and say, “Let’s do it!”

*On a side note, the technical term “bad debt” does exist. In corporate circles it means, “A debt that cannot be recovered.” Businesses and banks might use this term to mean that someone owes them money, and they are going to get little to nothing in return.

What is good debt?icons_2008009542-1113int-icons_checkmark

Good debt would then be a loan that is for the things you need. Many families consider mortgages and student loans to be good debts. They are an investment in your future. You could argue that car loans are good debt as well because you can buy a car that gets you to and from work.

So, you agree?icons_2008009542-1113int-icons_wrench

I don’t agree. In the end, money and debt aren’t good or evil. They are tools and financial situations, and they have no inherent morals.

Example: A wrench is not good or bad. It’s just a wrench. How you use it defines good versus bad.

Are there types of debt I should avoid?icons_2008009542-1113int-icons_lightbulb

Honestly, you should avoid borrowing money whenever possible. All debt has risk associated with it. When you borrow money, keep in mind that—someday—something major will happen in your life that was not planned. A pregnancy, a leaking roof, or a drunk driver will change your plans very quickly. Owing lots of money restricts your choices of how to handle those events.

I am considering borrowing money. How do I know I am making a good choice?

That is a longer conversation. Check out my other blog posts for more wisdom.