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Does Good Debt Exist?

Is good debt a such thing?Is there really a such thing as good debt? Can you really classify any debt as not being a negative? Do you see all debts dragging you down to apply for a IVA debt [1] to avoid bankrupcty?I’ve noticed that there will be folks that classify themselves as being in “good debt” and they will frown upon those that are in “bad debt.” At the end of the day, debt is still debt and I’m here to debate if good debt really does exist.

First of all, I’m sure we all know by now what’s considered good debt. What exactly is good debt? Let’s look at each level of supposed good debt to see the pros and cons of it.


Using student loans to pay for your college education is a classic example of supposed good debt.Investing in your education through loans could be an excellent strategy for increased earnings in the future. Unfortunately it could also cause a steep burden. Let’s look at using debt to obtain an education.

Why this debt can be considered “good”:

You may increase your income earning potential. It’s no secret that going back to school to earn your Master’s Degree or to pick up a whole new education, could do wonders for your wallet. Higher credentials could be just the thing that you need to hit your income goals… and who knows? Maybe even get rich [2]!

You can pursue opportunities you may not have otherwise. From types of work to new business startups, all kinds of new opportunities could come your way once your earn your education. You could enter a totally new field that interests you more or you could move up the latter in your company much quicker.

Why I would argue that this is “bad debt”:

You earn an education that you don’t care for. As you young person you may not consider the financial consequences of acquiring massive amounts of debt to pay for your education. Consequently, you might be in school for the sake of being in school and earn a degree in a field that you’ll never work a day in your life. Is it really worth going into debt for this?

You don’t consider working. Many people often don’t consider working in college. Some will even use debt to live and pay for living expenses for the time that they’re in school. This debt creates a false level of security because this money needs to be paid back eventually.

Home purchase.

A mortgage is the most common form of debt. A home mortgage is also often considered a form of good debt. Actually let’s be honest, many people with a mortgage don’t even consider themselves to be in debt. Has anybody ever purchased a home with all cash? Does anyone consider a mortgage to be bad debt?

Why this debt can be considered “good”:

You can use leverage to invest money in an asset that will appreciate greatly. When you obtain a mortgage on a home and it appreciates greatly in value in a short period of time, you’ve essentially made a solid return with using debt as leverage. This is assuming that you sell the property at the right time and you don’t lose your savings on interest payments.

It’s a solid financial goal. We often have problems with saving money. It’s just too easy to spend money. A home purchase, with the mortgage payments that follow, can be financial goal that we need to start saving money. For some there only investment is their primary residence. A home can often be the best financial decision that some people make.

Why I would argue that this is “bad debt”:

You blow lots of  unnecessary money on the property. From home maintenance (taking care of your lawn) to all of the other costs that go into a home, you’ll find yourself spending lots of money on top of your mortgage payments. This is money that you must consider as you decide if a mortgage really is a form of debt debt.

Interest payments. You must remember that the more money you borrow, the more money you’ll spend on interest in the long run. You’re not borrowing this money for free so you must factor in interest payments into any profits or appreciation that you calculate.

Taxes. The property taxes on a home are enough to cripple some people. This is money being spent on top of everything else.

Other unrelated costs. From a new home entertainment system to repairing a furnace in the middle of the winter, there are many other unrelated costs that go along with a mortgage.

Do you believe that there is a such thing as good debt?

(photo credit: me and the sysop [3])

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18 Comments To "Does Good Debt Exist?"

#1 Comment By Tim @ Faith and Finance On November 4, 2010 @ 7:08 am

I’m glad you balanced the ‘good debt’ argument with the facts that can make it a ‘bad debt.’

I’ve always viewed a house as an expense and getting into mortgage debt isn’t something I want to do right now. (Getting into real estate as an investment is another story, but I’m not able to do that either 🙂

I think that student loans can be good debt, but the borrower needs to realize that school debt payments can really be a huge burden and should be carefully evaluated.

#2 Comment By Debt Guy On November 4, 2010 @ 7:53 am

Really good article. Debt, like all financial instruments, can be good or bad depending on the situation. Perhaps more important than the situation however, is the attentiveness of the individual to his, or her, own finances. I sure wish I had begun planning my financial future at a younger age, maybe then I could have started my journey to financial freedom earlier than I actually did.
Today I am virtually debt free, which is great, but the debt that I do carry is current and at a very low interest rate. This allows me to effectively use this debt as capital. (That is good debt in my book.) I can’t stress enough, however, how important it is to eliminate real debt. Debt is a financial killer; eliminating it is the first step to financial freedom.

#3 Comment By Debt Guy On November 4, 2010 @ 8:00 am

Oh, one thing I forgot to mention. In most economies owning a home is a good debt. Right now, with home stagnation as it is, this usually sure bet is a little less attractive. However, remember one day things will change and home prices will rise again one day. Also, I didn’t see in the article that the author mentioned the negative liquidity factor of home ownership. When you rent, you can up and move with little notice. But when you own a home, it takes time to sell and limits your access to geographic mobility and access to your invested capital.

#4 Comment By Scott N. On November 4, 2010 @ 9:27 am

It took me a long to realize that debt wasn’t right for me. It may be right for some people, but at least for me, the only debt worth having is a mortgage. Even that, I’m planning to get rid of as soon as I can.

Great article!

#5 Comment By Goal Hunter On November 4, 2010 @ 9:36 pm

Good debt is debt used to earn more money.

Bad debt is consumption debt.

#6 Comment By Briana @ GBR On November 5, 2010 @ 6:42 pm

I really don’t believe there’s such thing as “good debt” because even with an education or a house purchase, you could still get both of those things without getting a loan. It’s just about shopping around and working out different plans. No debt is good debt 🙂

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#9 Comment By Best Credit Cards Canada On November 8, 2010 @ 11:41 am

The term good debt is term coined by the finance industry for their benefit.
A debt could be good or bad based on your financial situation and how much the debt has benefited you. Buying extravagant clothes and shoes beyond your financial means using credit, would be bad debt. Going to graduate school which results in a high paying job that helps you pay off your student loan in 5 years and helps you have a stable and financially secured life after that is good debt.

The reason mortgage is good debt is of course, it builds your credit worthiness and in most cases the value of your home appreciates. You can get a HELOC on your home for medical or family emergencies. A student loan is a good debt as long as you use your education to get a good job and build a career.

One needs to understand their financial limitations and accordingly choose debt path. Of course, this is only if debt is your last option.

#10 Comment By Evan On November 8, 2010 @ 4:16 pm

I don’t think there is such a thing as good debt and bad debt. Debt is debt, and how you use it is either makes it a smart decision or a stupid one. Your cons really just emphasize people making stupid decisions (i.e. $250K in undergrad loans for an art history degree)

#11 Comment By The Financial Blogger On November 9, 2010 @ 6:28 pm

I think there is a lot of great opportunity where leverage is a good debt:
– buying a land or an investment property
– invest in the market
– invest in a specific venture (my online company for example).

great article MD ;-D

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