"Is There Such a Thing as ""Good"" Debt?"

Good debt is borrowing you can afford that gains you good opportunity, needed possessions or valuable skills. With good debt you can improve your financial position, enjoy the benefits of “big ticket” purchases without putting up all the cash in advance or increase your earning power down the line. Can debt become a trap? Of course, but used wisely, the following five examples of good debt can pay off for you.

Your Home Mortgage

Under the right circumstances, taking out a mortgage to buy a home is like a tax-free investment.

  • You must have somewhere to live, so you’ll be paying housing costs no matter what.
  • Mortgage interest rates typically place a home loan among the least-expensive consumer borrowing.
  • The assumption is your house will have increased in value by when you decide to sell it. The profit on the sale is in whole or in part tax-free.

A home mortgage is usually good debt, but do be aware, housing is a cyclical industry and home prices can go up as well as down.

Your Auto Loan 

Is an auto loan good debt? It can be. Like housing, private transportation is a must for most people. So you are going to be paying for a vehicle, either in cash, through a lease or with debt. Auto loans, particularly from dealers, typically have high rates, even when disguised with low- or no-percent introductory rates. You must shop carefully and read the fine print. Often, a loan helps you get in a vehicle you could not afford with cash, but which is reliable. Maintenance savings alone can offset the difference in paying cash for an older car. Plus you have an asset with great value. With a lease, you have nothing at the end of your lease term. Just don’t fall into the trap of making good debt into bad debt by getting more car than you need.

Paying Off Bad Debt

In general, high-interest debt, such as a credit card, is bad debt. A consolidation loan or even a home refinance loan that gains you a lower interest rate with which to pay off bad debt is good debt. Even a new credit card with a lower rate than current cards - and the ability to transfer balances for low or no fee - can be good debt. Just make sure to limit the use of the good debt to paying off the higher-rate bad debt.

Investing in Education

Loans for higher education are an investment in yourself and can be good debt. Through government programs and private lenders, there are many low-rate borrowing options. Make sure the education you receive provides needed skill to widen your professional horizons.

Business Investments

If you have the knowledge to evaluate a business venture and the opportunity to borrow to invest in a profitable enterprise, this can be good debt. Not only does the business return on your investment through profits, but the value of the business increases as it grows. This good debt is only for those with knowledge and experience in business.

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