We’ve all heard about the difference between good debt and bad debt. We’ve also all looked into the argument of good debt vs. bad debt and attempted to decipher what category certain purchases fall under.
Seth Godin touched upon this topic recently, when writing about how consumer debt is not your friend:
Dave [Ramsey] has spent his career teaching people a lesson that many marketers are afraid of: debt is expensive, it compounds, it punishes you. Stuff now is rarely better than stuff later, because stuff now costs you forever if you go into debt to purchase it. He’s persistent and persuasive.
So how does this tie into good debt vs. bad debt? The general theme of the article is that bad debt is anytime you go into debt to make a purchase that depreciates in value over time.
As a result, I want to open up this discussion and look at common purchases as to where they would fall under the– good debt vs. bad debt argument:
Your car:
Are you better off buying that use car with cash or that brand new car with credit?
There’s the argument that you need a car for the following reasons:
- 1. Get around town.
- 2. For job reasons.
- 3. For job interviews.
My only comeback is this: do you really need to go into debt for that new car? I’m not telling you to take the bus, because that would just be lazy advice. The decision you need to make revolves around the thought process of how valuable is it for you to go into debt to acquire a new vehicle? Will a used car not be suffice? You don’t want to kill your finances because of a car. If filing bankruptcy becomes a consideration for you, then you should consult a professional for your options.
Your home/primary residence:
You shouldn’t view your primary residence as anything more than a shelter/place to live. If you start to view it as an investment, you will be really disgruntled during a recession, when home prices sharply decrease in value. Not only will lower home prices discourage you, but the realization of how much money goes towards interest and other related expenses, will definitely depress you.
On the other hand, your home may greatly appreciate in value and this increase could offset all of the other costs. Unfortunately, this is a optimistic and rare scenario.
There is no right or wrong answer in this discussion. There will be those that argue that rent is, “throwing money away,” and there will be those that urge you to wait until you have enough money to purchase the home with cash. At the end of the day, this will likely be the most important decision that you’ll ever make in your life. Put in ruthless amounts of research before you ultimately make your decision.
Your education/Graduate School:
Most young people don’t even think twice before acquiring debt to pay for their college education. I’m not saying that this is right or wrong, it’s just what happens.
One thing you need to consider is how much more valuable you will become with your Graduate Degree/new education. If you plan on starting your own business or working for yourself in any way, shape, or form, do you really need to go into debt for more education?
Once again there will be those that leverage the debt required to obtain a Graduate Degree and use it to score a 6-figure salary. There will also be those that use debt to pay for an education that will simply never benefit them. Where do you realistically see yourself 5 years down the road, once you’ve used debt to expand your resume?
What would you guys consider to be good debt? What would you consider bad debt? Do you even think there’s a such thing as good debt?
(Note: Sorry if you found this article to be all over the place. I really don’t have an answer to this debate and I would really love to gather your input.)
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My take:
All debt sucks, but I don’t mind having a short mortgage. I’d consider a 15 year mortgage or less, “good debt”…otherwise, the interest just becomes overwhelming.
I despise our car loan and am trying to kill it quickly…I’d consider car loans “bad debt” since a car depreciates so quickly and it is truly a choice most of the time…my husband didn’t need a new car, he just really wanted one.
I also think that education debt is “good debt” if it gives you options that were previously unavailable or for a specific purpose.
Car- never buy new. Plain and simple. Losing thousands of dollars the instant you drive it off the lot = bad idea in my book. Buy a used car with just 5,000 miles on it if you really want something new..ish…
I agree with fun stuff, all debt does suck. I don’t have a mortgage yet, but I have plenty of student loan debt… I personally view it as good debt because right now without my education, I would not have my current job, which is allowing me to pay for grad school, and pay down my education debt – not to mention live comfortably. Sure all debt is bad, but the majority of people in the workforce with degrees today probably would not have a degree if nobody took on student loan debt for school. For one, the cost of tuition is and has been rising much faster than the rate of inflation! That’s just not fair!
No debt is good, unless you’re the lender.
If you’re the lender, you have the money … the money to afford all the social marketing needed to trick people into believing that borrowing money is good. The more people that believe it, the more people that will come to borrow money. You, Mr. Lender, win.
“You shouldn’t view your primary residence as anything more than a shelter/place to live”
This sentence needs to be tattooed on everyone’s forehead. If you want to play the real estate game, then do it … but don’t do it from the base of your fundamental shelter needs. Think diversification.
If you’re thinking about borrowing, put the notion out of your head. It is a suckers game. You pay because of your lack of patience and/or self control. The lenders are prey on you.
After reading books like The Millionaire Next Door and stuff by Dave Ramsey, I’ve also come to view a car loan as bad debt. I’m now on board with most other commenters and plan on buying quality used cars in the future.
Regarding a home, I guess it depends on how much you really want something to “call your own.” Some people like to settle down in one place and not move around.
I’m not too knowledgeable about the history of home prices. But I’ve heard that over the long term, prices rise. So if you want to be a part of this investment and can afford the payments, then it’s definitely something to consider.
And since I’m a college graduate with a decent job, I’d have to say that school loans are a form of good debt.
But as you mention, if you plan on starting your own business, if you were influenced to be more entrepreneurial at a young age, you might be able to save a lot of money by just digging in and getting your hands dirty.
Generally speaking I think all debt is bad for the simple fact that you OWE someone else money. However, much like Dave Ramsey, I don’t think that taking out a mortgage is absolutely wrong, but I do have a problem with paying banks interest for the privilege to do so. I am also not fond of student loan debt since statistics seem to suggest that too many people end up with lots of debt and no real value from their expensive degree—at least not enough to justify going into debt to get.
With that said, I’ll never EVER buy another car fresh off the lot and have been quite satisfied with my paid for cars. Our house is currently under contract and once we are out of it, we will not be borrowing money for the next one, but instead saving up over 5 years to pay for it in cash. Until then we are absolutely fine with the prospect of renting to accomplish that goal. And finally, I am currently going to school part-time and debt free. I fully intend on applying for Financial Aid starting in the Fall, as I had to complete some classes before I was eligible. I will also be applying for grants and scholarships as well and see no reason to bog myself and my family down with debt just to get an education. I am perfectly okay with the fact that it will take me a little more time to complete my degree, BUT once we are done saving our $15,000 emergency fund I fully intend on stepping up my efforts to complete my degree much faster. With no debt to speak of, and a cozy savings in place I will be in a much better position to fully engage my education without the added burden of stress due to loans and debt.
(The bankruptcy rate as well as the drop out rate of students due to the stress of debt is a very telling tale.)
Sorry this comment was so long, I guess I had a lot to say. This is an excellent topic and I think your post made me want to write about it on EOD. Thanks!
I believe the reference to “good” and “bad” debt is directly related to how it is interpreted in ones credit score.
I am not concerned about my credit score because I plan to live a debt free life (once i get there), so I consider debt to be debt regardless of the type of debt. It is all money I owe to someone else and it is in the way of me getting what I want.
Remember, when buying a car on credit, you are not only loosing value on the car each year but you are paying interest on it (depreciating asset).
Education can be a good return but look around today and see many graduates working in grocery stores, retail stores, call centres, etc. instead of their actual fields.
There really is no such thing as good or bad debt. In fact, debt can neither be totally good or totally bad. There are always two sides to the coin.
No debt is good. The simple premise of debt is the risk and obligation you apply to your future self. When you take debt in whatever form you may want to classify it: good, sexy, bad, naughty; you are trading your future money (income) with your present pleasure (or comfort, if you want to call it that).
All debts assume great risks, albeit in varying degrees. When you don’t assess the risk correctly, you lose – and you wallow in the quagmire of your debt.
Here’s the other side … Let me ask you, do you use water, natural gas, electricity in your home? We all know the answer to that, of course; and guess what, you are actually using credit. Surprised? Well, you may not realize it but you are in debt to the water or electric or gas companies for services they provide even before you pay them. Make sense?
Of course, it does. In an abstract sense you owe these utilities and that is credit. So, how does it differ from any form of debt or credit? You get something now (e.g. your comfort) with the promise to pay later; you pay on time, no penalties are attached. Well, if that doesn’t sound just like a credit card!
Everybody uses credit, unless you are totally off the grid.
Everyone uses credit unless you are completely off the grid. I would say that this is the extreme exception. Debt is not all bad; it can actually be used as investment to make more money out of it or maybe hedge against inflation. But you shouldn’t use credit to live beyond your means. Now that is a bad reason for debt.
Frankly the fact that debt has a bad connotation and bad denotation should be evidence that is negative asset (like my play on words?:)
For the a while now I had my mind stuck on buying a used 2006 Mazda3 hatchback I love the car, but even with what I had saved I didn’t have enought. I owuld have had to finance a few thousand. Then it struck me why the heck would I want to finance a USED car! So I had my dad search for me and I searched and finally today my father found a me a used car in my price range. Granted the Car will last me about 5-6 years but thats okay because by then I would have saved enough to buy my mazda3! During this time I will also aggressively be paying down my undergraduate student loans.
I have to say I was among the few…thankfully I graduated with about 45,000 in loans. I went to a private school so this average to 1 years tutition! I know many others’ parents had to take out a second mortgage! even after this they had to go back and get a trade because they couldn’t find a job!
I believe you definatly have some very good points. Alot of people like myself probably wish they would be able to say no to the things that put them into debt before they get to that point. I would never pay for a brand new car because it does depreciate in value as soon as you drive it off the lot, also if you could pay in cash which most people can’t, you would get a new car way cheaper. Isn’t that crazy, somebody who could afford to pay for a new car in cash would get it cheaper than someone who couldnt. Also, the used car for cash, i would be worried that i would put tons of money into it fixing it up, considering it was used, but that would be my choice. Also, being a college student i am already 5,000 dollars in debt, but i have only been in school for 6 months, half of that was to pay for my education, even after i was granted a pell grant. All debt is bad to me, my question is why does everybody say you need a college education and then you get 100,000 dollars in debt? Or buy a new car it will build your credit and you end up paying 7 grand in interest. I do not get it, can somebody explain that. Money money money!