Financial advisors have long advised that some debt is “good debt” and some debt is “bad debt”.
Some examples of bad debt are credit card debts, department store credit card debts, purchases of expensive “toys” like boats, big screen TVs, stereo equipment, videocameras, and so on. It doesn’t make sense to go in to debt for something which loses value the minute that you buy it, that costs so much in interest that you technically are paying 20 or 30 percent more than the purchase price, that will take years to pay off (to the point where the item probably broke or is obselete while you are still paying it off), and which is not a necessity.
Most financial advisors consider that borrowing a house or a condo, a car, or money to pay off a college education, however, is good debt.
A car is often a necessity of life in order to get to school or work; it’s very hard in many parts of America to function without a vehicle. Cars do go down in value, but car loans are generally lower interest than credit card loans because they are “secured debt”, and cars still maintain SOME value even as they get older.
Houses at the moment are going down in value but historically over time their value will appreciate, so if you plan on staying put for five years or more, they are often a good investment.
And a college education pays itself back many times over because college graduates can earn higher wages and advance further in their careers.
However, here are some times when this seeming good debt is actually bad debt:
Buying more house than you need is never a good idea. Smaller houses use less energy, cost less to maintain, and, of course, are generally cheaper. The crashing real estate market has taught us all that buying a house that you can barely afford, on the assumption that you can sell it for a profit in a year or two, is NEVER a safe bet. And getting an adjustable rate mortgage is almost always BAD debt.
The same goes for car loans. Do your research, buy a car that holds its value, and buy for value and for whatever your needs are, not for looks and style.
As for college loans, while community colleges and state universities are a great bargain, think carefully before paying for a “career college”. They cost much more than state universities and community colleges – for the same education – AND they often have much lower job placement rates for their graduates than for a traditional degree.
So think carefully before you incur any kind of new debt and consider how much that debt will REALLY cost you and what you are getting out of it.
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