What is good debt?
Most people think that all debt is bad debt, but this isn’t true. Some debt is good, healthy debt, and it depends on a few different factors whether it can be considered good or bad debt. It is impossible to pay cash for all the sizable purchases we have to make over our lifetime. Purchases like college educations and a home cannot be bought by saving money since it would take way too long. Loans like this help to build a good credit history too. A car loan that is paid back on time paves the road for another loan in the future with a better interest rate since you won’t be seen as a high risk.
Buying a Car
While the best way to buy a car is to save the money to buy one, if that is not possible, then finance a car. That can be considered good debt. Make sure the loan is low-interest, and that you can afford the monthly payments. Even good debt can turn on you if you cannot make the monthly payments.
Buying a Home
The best way to buy a home is to save up a down payment then finance the rest of the purchase amount. The more money you can put down on the purchase, the lower your monthly payments are since the amount of the loan is less.
Good vs. Bad Debt
Good debt is debt for something like the examples above; financing a car or purchasing a home. These are essential purchases. Bad debt is high interest loans for things that aren’t needed. Credit card debt is an example of bad debt. The interest rates are high, and most of the time it is not used for emergency situations, but for impulse purchases.
Saving money is the best way to make purchases unless it is for big ticket items or things that will increase the resale value of your home. Taking a loan out for a large home repair, or for a remodel that will add to the value of your home, and return a large investment of money at a later date, is good financial planning.