Depends who you ask! Some financial gurus will tell you all debt is bad. Some will tell you that all debt except home-loans are bad.

However, 99% will agree on this:

Any debt used to finance things that have no resale value, or things that loose value over time is bad debt. This type of debt should be avoided.Bad Debt

Examples of Bad Debt

Here are a few examples of debt that should be avoided, or paid off as soon as possible if you already have it:

• Vehicle finance (yes, really, you should buy your cars cash)
• Store cards (e.g. clothing accounts)
• Using your credit card to pay for a holiday
• Furniture purchased on credit
• Appliances (e.g. stove, fridge, microwave, etc.) purchased on credit
• Re-mortgaging your home to buy a car / redo your house’s interior / etc.

Is a home-loan Good Debt?

In my opinion: no.

I do realize that for 99.9% of people, it is impossible to buy a home cash, and therefore having a home-loan is unavoidable.

I also acknowledge that, over a period of time, most properties increase in value. Having debt on a property is certainly much better than having debt on something that looses value over time, e.g. a car.

However, I still think that for most people a home-loan is a bad form of debt, and if you have a home-loan, you should try to pay it off as soon as possible.

My reasons for saying this are:

• For most people, the house they buy to live in is not an investment, it’s and expense.
• Many people borrow money from their home-loan to pay for other things, e.g. re-doing your house’s interior, buying appliances, etc.

Is there any form of Good Debt?

Yes. There are some debts that are good.

A good debt is a debt on something, that either grows in value fast enough, or produces enough regular income, or a combination of the two, to pay not only for the interest on the debt, but also enough more to justify your effort and time spent.Good Debt

In other words, good debts make you more money than they cost you. Not only that, they also make you enough more money, to justify the time and effort you’ll need to spend managing whatever it was you made the debt for.

Here are some examples of good debts:

• When starting a business, you’ll often have to make a loan to pay for your initial capital outlay.
• Finance on a property you plan to let out. However, do your research, it must be worth it! Both to pay for the interest on the loan, and to pay you for the money, time and effort you’ll have to spend on maintenance, advertising, finding tenants, etc.
• Sometimes, buying a vehicle. E.g. if owning a truck will enable you to make money out of deliveries, and the money you make is enough to pay for the interest on your loan, and to justify your time and effort spent on deliveries, then the finance on your truck is a good debt.

Here are some more facts about good debts. Good debts are usually:

• Made only after thorough research.
• Accompanied by a good business plan.
• Require effort and time on your part to make them worthwhile.
• Not very glamorous. E.g. if you need a truck for your business, and a seven-year-old 2nd-hand pickup will do the job, then making debt to buy anything better will be bad debt.

I hope this clears up any confusion about what good debts and bad debts are. I’m planning a few more follow up articles around the subject of debt, so if you found this article helpful, keep reading!

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bad debt, Debt, good debt