Good Debt vs. Bad Debt vs. Necessary Debt: What’s the Difference?

debt

We hear so many conflicting opinions about debt and about money; and we don’t know what to think. Do you have a car payment or do you have an unreliable car? Do you borrow money for a home or do you not? We know that sometimes you have to go into debt to make it in life, but we have to figure out what is considered good debt and what is considered bad debt. More importantly, we have to consider what is necessary debt and what is needless debt.

For example, no one wants a car payment. But what happens if you cannot afford to pay for a car using cash and you need one to get to and from work because you don’t have the option of using public transportation where you live? Let us help you determine when debt is good and when it’s bad; I promise it will pay off.

Buying a Home

If you can pay cash for a house, why are you reading this? In all seriousness, most people cannot afford a house without going into some debt and that’s what we consider good debt. It’s far better to put your money toward something that will eventually pay you back than it is to go into debt paying rent forever.

We do believe that you should always put down a significant down payment. This no down payment thing is baffling to us. Buy what you can afford, put down a lot of money and work hard to pay that house off as soon as possible. It’s a good debt that way.

Buying a Car

We like to say that a car is not a good debt. It has no value. It’s never going to be worth more than you owe, but sometimes we think it’s necessary. Let’s say, for example, that you have a car but it breaks down all the time and you are late for work, miss work and paying huge repair bills all the time. When it’s more expensive for you to deal with this car than it is to buy a new one, it’s time to finance a new one.

Your job might depend on the reliability of your vehicle, and paying thousands every month in repair bills is far more expensive than buying a new car. Just remember; buy something a little bit used and already depreciated, and don’t buy more than you can afford.

Credit Card Debt

Bad, bad, bad. There is no getting around this. If you cannot afford to pay for something in cash, you cannot afford to pay for something with a credit card – I don’t care if it’s your dream vacation, tuition or your wedding; it’s bad debt.

Payday Loans

These are so expensive to borrow money from that you will likely spend far more than you borrowed paying them back. It’s not worth the price you will pay to borrow a loan like this. These are horrible loans, and you should avoid them at all costs.

Student Loans

These are so expensive, but sometimes they are necessary. Remember to find the lowest rate, to borrow only what you need and to exhaust every other option for paying for your tuition before you fall into this requirement. You could find yourself in financial ruin otherwise.

Photo Credit – Getty Images

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