Good Debt. What is it?
Yes. There is such thing as “good debt”—in fact, some types of debt can be advantageous if managed responsibly.
What is a Good Debt?
Inherently, there is nothing right or wrong about borrowing when the debt is managed responsibly, but generally speaking, “good” debt is taken on in order to finance something that creates value or produces more wealth in the long run.
Examples of Good Debt
1. Mortgage Debt
Mortgage debt can be considered “good” debt since owning a home builds equity. You borrow money to pay for a home and as you pay off the mortgage, you own more and more of the value of that home. As well, you hope that your home will be worth more by the time your mortgage is paid off – and that gain is yours. Finally, if you decide to rent out your home or part of your home, you are creating income as a result of the mortgage.
2. Student Loans
Student loans can be considered “good” debt if you’re pursuing education for a career. You’re financing education which can potentially lead you to a higher income in the future.
3. Business Loans
If you wish to start your own company and work for yourself or borrow money to pay for purchases that will contribute to your business growth, it can be considered “good” debt because it will provide the capital required to run a successful business.
The Bottom Line
Good debt is the type of debt that can be considered as an investment, such as a mortgage on a property, a student loan, or a business loan, if it can help you increase your net worth and build wealth in the long term.
Keep in mind, however, that debt can be “good” or “bad” depending on your financial circumstances. Even if it can increase your net worth or has future value, if you cannot pay it back responsibly or within the terms agreed upon, then it is bad debt.
Shopping around for the lowest interest rate and establishing a timeline to hold yourself accountable to your repayment plan are ways to make your debt “better.”
Whether or not to take on debt is a personal decision. If you’re making a purchase that increases your debt, ask yourself if you will ultimately get more out of the debt than you pay in interest and if it will benefit you in the long term.
[Related Article: Should You Pay Down Debt or Invest?]
This content is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this content should consult with his or her financial partner or advisor.