The Difference Between Good Debt & Bad Debt

The Difference Between Good

I was recently asked by a journalist if there was such as a thing as good debt?

I asked my financial advisor, Chenine Gouws, what she thought below is the response she sent to me by email (Or just scroll down to watch my video response):

 

Good debt is debt that'll result in a growth in value or will generate long-term income

 

1. Student Loans

 

This is debt that's used to pay for a university education and is the perfect example of good debt.

Student loans generally have a very low interest rates compared to other types of debt. A university education vastly increases your chances of having superior earnings in the future, which is why it's considered good debt.

 

2. Home Loan

 

Mortgages generally also have lower interest rates than other debt, mortgage interest is also tax deductible.

Even though mortgages are long-term loans, 20+ years, those relatively low monthly payments allow you to keep the rest of your money free for investments and emergencies.

If you buy wisely (location matters) your home should increases in market value over time, enough to cancel out the interest you've paid over that same period.

 

3. Second Home Loan

 

If you buy an investment property, purely to rent out again try to make sure that the income from the rental covers all costs (bond and rates etc.).

This will make the investment a Good Debt.

 

4. Car Loan

 

Car loans can be an example of good debt, especially if the vehicle is being used to generate income, however cars and trucks lose value over time.

When the vehicle's just for home use it's best to pay for it in cash, not debt. 

If you have to take out debt, pay as much money upfront as you can.

The more money you pay upfront, the less you spend on high-interest monthly payments.

Each purchase or debt made needs to be analyzed on an individual basis.

 

Check Out My Video Response

What are your thoughts?

Do you have more good debt or bad debt?

Let's talk in the comments section below.