An Overview of Good Debt

Nobody likes to hear the word 'debt', which is quite understandable. When you're in debt, you have to constantly live on a budget if you're looking to repay the debt quickly. For some, they get to repay their debt, while others carry it on for decades. Clearly, with the way debt weighs people down, no one wants to live with such hanging over their heads.

Consequently, debt is generally considered a negative term that can be overwhelming. However, it's crucial to understand that there certain types of debt that are worthy of consideration. This is why you should understand the difference between good debt and bad debt.

What Qualifies as Good Debt?

If you want to build your credit score, you’ll need to handle some amount of debt. Bad debt can damage your credit score while good debt can help to build your score. Bad debt is defined as purchases on credit that don’t ultimately increase your value. For example, a new car will depreciate by 20% in the first year. Even if you sell your car a year later, you would have lost a certain amount of money over the sale. You could classify this purchase as bad debt.

Good debt, on the other hand, will make you money in the end. For example, taking a payday loan to open an online shop could be considered good debt. As long as you pay it back, you'll be good to go. Basically, if you are falling into debt for a little period to pay it right back, that is considered good debt. This will help you raise your credit following your repayments. So, good debt is something you plan and do by choice.

Higher Education

In many cases, having a degree opens up doors to better job opportunities and overall higher quality of life. Many young adults take out student loans in order to pursue higher education. With higher education, you can get a job with a higher salary, meaning that a student loan is an investment that will generate revenue in the future.

Many people, however, are debating whether or not education is worth the price tag. Tuition is at an all-time high, and the rough economy can make it difficult to find work after graduation. Student loans may be harder to pay back than you think.

Additionally, once you get a job, your salary will be largely determined by your field of study. An engineering degree and a philosophy degree entail two entirely different pay grades.

Having a degree will definitely move your job application up in the pile, but whether or not a large student loan is a good debt or bad debt depends on how you go about it.

Entrepreneurship

As the job market becomes more and more competitive, many people are opting to start their own enterprises. Starting a business requires money, and while angel investors, venture capitalists, or even family and friends can help get you started, many choose to take out loans.

There are overwhelming benefits to being in business for yourself. Financial freedom is just the tip of the iceberg. However, like higher education, entrepreneurship debt can be a two-edged sword. If your business fails, you’ll have to pay back your loans as well as any subsequent interest, leaving you worse off in the end.

So if your business fails, then you won't really be in good debt but actual debt. Therefore, a tip worthy of consideration here is that while starting a business might come with a high level of risk, buying one might not be as challenging. This means you wouldn't be starting from scratch. Obviously, you'll ultimately do that which you consider the best option. At the end of the day, listen to your own inner voice and your gut to make any decision.

Final Thoughts on Good Debt

While certain types of debt have the potential to yield benefits, there are never any guarantees. Taking on any kind of risk always comes with challenges and pitfalls. Borrowing capital to pursue ventures has worked out for some but devastated others. Ultimately, everyone has to determine whether or not they are willing to take on debt and make the decision they think is best for their own finances. Be sure to talk to a trusted financial advisor before taking on any kind of risk.

If you get a payday loan, you should be especially diligent about paying all the fees on time. This is basically the best way of doing things regardless of who you are. This way, all debt will eventually be good debt.