Good Debt vs. Bad Debt

Whether you realize it or not, there are actually good and bad types of debt. Good debt is usually described as any form of debt that could be considered an investment that creates value. While good debt still costs you money, you get something worthwhile out of it in the end. In contrast, bad debt is usually used in purchasing disposable items that provide no real investment. As you might have guessed, debt relief companies deal with a lot more bad debt than good debt. Here's a look at some real world examples of good debt and bad debt:

Good Debt

Mortgages

A typical mortgage is well over $200,000, so what about it makes it a good a form of debt? Mortgages are a good type of debt because they are generally safe investments. The money you put into your mortgage goes toward paying your home off. Your home is a valuable asset and has great potential to be worth much more than what you paid for it.

Auto Loans

An auto loan is another good form of debt, if you can get one at a reasonable interest rate of course. Like a mortgage, it's basically an investment and something that very few people could afford to pay for in cash. Generally speaking, the best auto loans have low interest rates and length terms under 60 months.

Education Loans

One of the best forms of good debt comes in an education loan. Student loans usually have fairly low interest rates compared to other types of loans and you don't have to worry about paying them back until you've graduated from school. Also worth noting, college graduates tend to earn higher incomes so you can even think of student loans as a form of investment.

Bad Debt

Payday Loans

Not just considered bad debt, payday loans or cash advances are often considered the worst type of debt you can accumulate. These loans carry extraordinarily high interest rates, which makes paying them back all the more difficult. Of course, failing to pay back these loans only leads to more fees and debt.

Credit Cards

Despite the fact that nearly everyone has a credit card today, they are responsible for a great deal of bad debt in the United States. Although credit card debt carries high interest rates, the main reason it's considered bad is actually due to the nature of the items purchased with it. Clothes, entertainment, and food should not be purchased using credit, they hold little value after they've been purchased and only serve to rack up debt.

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