4.1.4 "Good debt" and "bad debt"
Although there is nothing inherently right or wrong about borrowing, financial experts often distinguish between "good debt" and "bad debt."
- Good debt is an investment in something that creates value or produces more wealth in the long run. Examples: a mortgage on a home, a student loan to pursue education for a career, a loan to launch a business, or a purchase made to accomplish your job or for your health.
- Bad debt is debt taken on to buy something that immediately goes down in value or to buy something that you can't repay on time and in full, thus incurring interest charges and more debt. Examples: charges on a store credit card at a high rate of interest, a personal loan to pay monthly expenses, or anything you don't really need or that is not really useful.
Keep in mind, though, that a debt may be "good" or "bad" depending on the circumstances. For example, a mortgage is usually considered a good debt because it's an investment in property that is expected to increase in value—but it could be a bad debt if you can't afford the payments.
- Date modified: