Is there really such a thing as “Good Debt?”
Debt. Yuck. As I’ve speculated on here before, I believe that excessive debt is the number one reason that the American economy has been tanking in recent years. One thing that I have failed to mention, though, is that there is such a thing as good debt. I know, people want to close their browsers right now, thinking that I have absolutely lost my mind. But I have not, I promise. Today, we’re going to look a little bit into what constitutes as “good debt.”
In short, good debt is debt that will eventually result in some sort of gain. Here are a couple examples:
- Student Loans- The most obvious of debts that can be considered “good.” You take out money, you get an education which is supposed to assist in getting you a good job with decent pay.
- Home mortgages- Yes, I’ve said that a home is a liability. Others have argued that the home is not the liability, the mortgage is. Even though I still disagree to a point (homes, like vehicles, can depreciate quickly), with proper care, they can truly be an investment. That being said, home mortgages, especially if the home is cared for properly, are good debt.
- Small business loans- This one is almost as obvious as the student loans. Sure, any loan is a risk, and starting a small business can be a huge risk, but overall, the intent is that it brings you a profit later on.
Now, in the current economy, are all of these still considered good debts? To be honest, I don’t think so, but it depends on the person’s current financial situation whether this debt can be considered good. A couple thoughts on this:
- On student loans: A college student just graduating with this poor job market isn’t receiving the “benefits” that student loans should be giving them. Thankfully, the government has put limitations in place that disallow lenders to have student borrowers pay more than 15% of their income, but this still can be a burden to many recent grads who are unemployed or underemployed. Question you should ask if you’re considering taking out this kind of loan: “Am I going to college because it’s what is socially accepted, or is it because I will use my degree?”
- On home mortgages: Like I said above, if you don’t care for your home, it will depreciate instead of becoming an investment. But, also, foreclosures are incredibly common right now. If you can’t afford it, don’t get it, even if the interest rate seems great. Question you should ask if you’re considering taking out this kind of loan: “Can I really afford these payments, or am I doing it because it looks like a good time to do so for everyone else, and I “think” I can swing it?”
- On small business loans: Due to the state of the economy, this isn’t the best time to build up a small business… or is it? I’ve read articles that seem to argue the opposite, that people are more willing to give their business to local businessmen because they, instead of the big national and international corporations, are helping to give local and regional economies a bit of a boost. I’m on the fence about this, especially as I consider starting my own small business within a couple of years. Question you should ask if you’re considering taking out this kind of loan: “If my small business tanks, do I have a backup plan or will I end up going into bankruptcy?”
My point? Even though the general perception of certain loans is that they are “good” debt, it’s incredibly situational. If you’re considering taking on some “good” debt, sit down and figure out if it would really be good for you in your current financial situation.
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