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November 9, 2023

Good Debt Defined

good debt and bad debt

Today being in debt is a fact of life. No matter who you are or where you live, chances are you’re in debt, either from mounting credit cards, personal loans, or all the above. However, not all debt is bad, in fact living a completely debt free life is not necessarily a good idea either – despite its debts bad reputation. If managed and monitored correctly debt can be very beneficial to acquiring a sound financial plan. Whether you’re in good debt or bad debt differentiating between the two can be tricky.  As people are unaware of the consequences of being over-indebted – or how maintaining a good credit rating is essential to a prosperous financial future. They are unaware of the purchases that are worth getting into debt for and the ones that are not due to a lack of financial education. We at Debtline want to help you make better more informed and responsible decisions when it comes to making important credit purchases.

Good Debt

Debt, for most people, is unavoidable, as many of us start adulthood with crippling debt. However, there are ways to use debt to your own advantage. “It takes money to make money” is the best way to understand what ‘good’ debt is. Good debt is money borrowed for investments that grow in value or generate a long-term income over time – either tangible or less measurable like education. Good debt is an investment that will not negatively impact your current financial situation but rather benefit it.

Education Loans

Loans for education are like the poster child for good credit debt. They are the prime example of an investment that adds extensive value to the possibilities of your future. Not only do educational loans have very low-interest rates but in furthering your education you increase your employment possibilities, which increases your chance of a suitable and stable income. Despite these loans having long-term repayment plans (20-30yrs) their relatively low monthly payments free up some excess cash flow for other expenses or emergencies.

Property

Property investments are also renowned for their good debt reputation. In fact, it is one of the most popular investments for good debt. Unlike other forms of credit, property investments have relatively low-interest rates plus the interest is tax deductible – saving you heaps. Property is one of the best investments you can make because houses, increase in market value over time, guaranteeing you make a return on your investment – or at least enough to cancel out the interest you paid.

Home Equity Loans

Home equity loans are considered ‘better’ debt as they are neither bad nor good. Creditors use your house as collateral with the amount and interest rate dependent on the appraisal of your house. Thus, offering lower interest rates than other forms of credit. A home equity loan may be a smart alternative way to consolidate multiple debt payments but be sure that you have carefully considered whether you will make your payments each month – if not you might be at risk to losing your home.

Business Auto Loans

Business auto loans, like home equity loans, is too, considered ‘better’ debt. Buying a car is notoriously considered ‘bad’ debt purchase as the car loses their value over time – opposed to gaining it. However, if your car purchase is for business, an auto loan is then invaluable as it helps your business which in turn helps your income.

If you’re in debt, you don’t have to struggle on your own. Contact Debtline and let our team of professional debt counsellors get you the help you need!