Sometimes, borrowing money makes financial sense, other times it is just the opposite. There are many definitions and interpretations about good and bad debt. This post will explain the difference, and aid you in making the best decisions around debt.

Good debt is the debt you take to help generate income and build your net worth. It's like using money to make more money. These are debts that increase your income in significant ways, and your return is worth more than the interest you pay.

Bad debt is generally considered to be bad debt if you are borrowing to purchase a depreciating asset only for consumption. In some circles, they argue that no debt is good debt while borrowing money and taking on debt is the only option many people can afford to purchase necessities. Those kinds of loans are usually justifiable and provide value to the person taking on the debt. On the other side, there is debt that's taken on carelessly as bad debt. While it's easy to differentiate between these two extremes, some debts can not be judged easily. One must note that determining good debt or bad debt depends on their financial situation. Examples of good debts are explained here, and shown to be important.

Examples of good debts

Education: In general, the more education one has, the greater their earning potential is. Education also has a positive correlation with the ability to find employment. Educated workers are likely to be employed in well-paying jobs and tend to have an easier time finding new jobs should the need arise. It's not a bad idea to invest in a college or technical degree which often pays for itself within a few years of entering the workforce. Although not all degrees are of equal value, it's worth considering both the short and long-term prospects for any field of study.

Personal business: Money that one borrows to start their business can also be regarded as good debt. Being one’s own boss can be financially and psychologically rewarding, so a loan that boosts profit margin can be good debt provided it is managed judiciously. Business comes with risk too, so research and evaluation are needed.
Home or real estate: Real estate offers a variety of ways to generate wealth. Houses can be bought, refurbished, and sold again. Or, they can be rented out to generate regular cash flow while also appreciating in value. An owner can live in a house, without paying rent, while its value continues to grow year over year.

Car finance: Depending on one’s situation, having a set of wheels may be a necessity. Having the ability to travel independently may also open new opportunities because they can go to different jobs or gigs with lots of flexibility. If having a vehicle will increase earning potential, then it may be a good investment, even with a loan. It's important however to ensure to buy a car that fits inside a comfortable budget.

Short-term loans for an emergency: Life is full of surprises, and these surprises are not always good ones. Unforeseen circumstances are bound to happen at least once. Sudden death in the family or a car accident may become a significant financial burden. If one is in this situation and out of cash, taking a short-term loan to help ends meet is not a bad idea. But be sure to avoid predatory repayment terms and high-interest rates.

Examples of bad debt

Credit card debt: This is considered bad debt because of the nature of the items it is used to purchase. Using a credit card to purchase clothes or food t should be intentional, along with
earning credit card rewards and paying off the entire balance one the due date.
High-interest loans: Payday loans can charge incredibly high-interest rates. Some payday loans can charge higher rates that will be nearly impossible to repay. Opting for these high-interest loans without a proper means of repayment is regarded as bad debt.
Auto loans: Buying a car might seem like a worthwhile purchase, but if it will not lead to better financial opportunities in the future, then it is bad debt.

5 Things To Know About Good Debt That Will Help To Avoid Bad Debt

1️⃣ Making wise decisions: Good debt is obtained by making a wise decision about one’s future and growth. Not just for the moment. For example, a Master's degree to increase one’s salary or getting a car loan to make deliveries require wisdom to know when and how to go about it, and to avoid bad debt.

2️⃣ Pay attention to how much you borrow: How money is spent, and whether or not it generates a return, determines whether or not a debt is considered good or bad. It is important to remember that any debt that's excessive or used to purchase wants instead of needs should be avoided.

3️⃣ Use good judgment: When making decisions to borrow money, one must use their head, and not their heart. Analyzing how to achieve it in due time is using good judgment.

4️⃣ Pay off your debt quickly: No matter how enticing a debt might be, pay it off quickly. This is the start of building wealth to get each loan paid, one must put in maximum effort and be willing to make personal sacrifices.

5️⃣ Seek counsel from a financial expert: When one needs to make decisions about finances, they should seek the advice of financial experts [you should seek the advice of a financial fiduciary since they are legally obligated to act in your best interest, without getting any kickbacks]. Financial experts are trained to build businesses and finance them without running at a loss. To avoid making decisions that can lead to regret or cad debt, it is wise to look for a reputable financial expert for guidance.

For some people, having some level of debt is almost impossible to avoid. But making smart choices about borrowing, as well as being aware of the good and bad types of debt,  one can ensure your debt doesn’t become overwhelming.