What Is Good Debt?

Debt comes in many shapes and forms. Some of it is good debt, some of it is bad debt, and some can go either way. Definitions will depend on whom a person asks, but generally, how the debt is structured, and the purpose for accruing it defines it as good or bad.

Good debt

This is generally a form of debt that allows a person or couple to amass an asset that appreciates, such as a house. The goal is to increase one’s wealth. Along with a house, other forms of good debt include:

  • A student loan that leads to a better-paying job
  • Money spent to increase the value of a home or asset
  • A small business loan that helps a business grow

It is important to remember, however, that some of these may seem like good debt, but turn out to be bad debt. According to financial experts, the goal is to make sure that a debt is healthy or productive. It needs to have reasonable and predictable rates and a regular payment schedule. It also needs to fit within a budget so that late fees and penalties are not an issue.

Bad debt

Bad debt is something many of us engage in. Generally speaking, it is borrowing to pay for something that has little or no long-term value or financial return. It pays for something that immediately begins to depreciate. Examples include:

  • A fancy pair of shoes
  • A nice meal in a restaurant
  • A car loan

Buying these things are fine, but they should not be purchased by borrowing or using credit cards where a person carries a balance and pays an exorbitant APR to do it. The car loan is a necessary evil for many, and they often have a lower rate than a credit card, but they can still lead to financial problems.

Proactive solutions are available

It is an unfortunate fact of life that we do not always get to choose the debt we take on. It could be a severe illness that racks up medical bills while preventing the person from working. It could be market forces beyond the control of a business owner. It could be a combination of factors. It can all lead to a person, family or business that drowns in bad debt.

While some may swim for a while as they try to eliminate the bad debt, the best option is to be proactive and come up with a plan to tackle this complicated issue. Working with a bankruptcy attorney is the first step. These legal professionals can help clients explore options for regaining financial control of their life.