Debt is everywhere, and they come in all shapes and sizes. Between credit cards, student debt, home loans and more, there are a myriad of ways to accumulate debt (and some serious stress). But not all debt is necessarily bad — some forms of debt are considered good. “The really simple way of looking at it is: bad debt is debt that’s going to cost you money,” says Brenton Tong, a Sydney-based financial planner. “Good debt is debt that makes you money.”
Good debt
- Student loan (HELP or HECS)
No need to stress over HECS debt (it’s considered ‘good’ debt). Student loans are an investment in your future, potentially opening the door to more career options and higher earning potential. They also have the best repayment terms of any loan out there.
- Investment/business loan
These loans are generally considered good debt because they involve using money to make money. Such loans also help businesses expand and grow.
- Home loan (mortgage)
A dream house can turn into a nightmare if you overstretch your finances. However,
a mortgage buys you the house, the house stops you paying rent, it gives you somewhere to live when you hit retirement. It’s what they call a ‘necessary evil’ – In Australia, there’s very little chance you can buy a home with cash outright, and therefore it’s a necessity. A home loan can turn into a bad debt when people overstretch themselves.
Mostly-bad debt:
- Car loan
Car loans are bad when they encourage you to overconsume. Many people now use them to upgrade their car every few years. It’s not a great asset to be paying interest on, given cars depreciate the moment you drive them out of the dealership. To some extent, these loans are a necessity, because some people can’t afford to buy a car outright and need one to drive to work. If you use your car for business or work, sometimes you can claim tax deductions on it, making it slightly better.
Bad debt
- Personal loan
A personal loan is usually where you end up if you have too many credit card debts. In a sense, a personal loan is your get-out-of-jail card, but what that means is you should start seeking help because you have a spending problem.
Of course, people run into all sorts of problems, including illness or a job loss, which may prompt them to take out a such loan. But overall, it’s usually a bad idea to spend money you don’t have. Apart from credit card debt, these loans are often used to fund things like home renovations or a holiday.
- Credit card debt
I hope we all can agree this is the worst kind of debt out there. It is the one with the highest interest. But what we should get more concerned about is the spending habit it creates — it reinforces your habit of spending money before you have it. Some people regard a flashy “platinum” or high-limit card as status symbol. But today, with all the payment systems around, alternatives are nearly always available.
