Is there such a thing as good debt?
Debt is often considered to be a financial gridlock. And for good reason, it chips away at your wealth for years and years to come in many situations. Debt essentially means you’re making someone else rich, one interest payment at a time.
Racking up credit card debt or using personal loans for expenditures like luxuries, used primarily to show off, is certainly a bad form of debt. Cars are also considered to be a form of bad debt, but I don’t agree with that narrative. The whole argument there is that since a car is a depreciating asset (an asset that loses value over time), it is bad debt. But I think it is not that black and white. If you’re using a little of debt, say half of what you make in a year, to finance buying a car that you’ll go to the office in or you’ll travel with family and friends with, then that is justifiable in my opinion. But, if you earn Rs. 20 lakh per year and go into debt to buy a Rs. 40 lakh luxury car just because some company lets you do that, that I cannot justify.
But debt can be good too. When the debt is availed with the goal of generating income using that money, it is considered to be “good” debt. Since this debt is not geared towards taking more and more money away from you as time goes by. One form of debt that I think is something you could bet on is the debt taken to start your own business, provided you’re not just shooting in the dark. Yes businesses more often than not fail but if you have a viable opportunity and things go your way, businesses can bring a lot of income your way.
Another form of good debt is housing loans. Like cars, I think if you want to live in a house, that is reasonably in your reach in terms of price, that debt is justifiable. But if you’re earning peanuts and trying to buy a beachfront mansion in Mumbai using a bank’s money, even if they do let you, you shouldn’t be doing that, probably, what do I know, right?
Also, unlike cars, real estate is an appreciating asset (an asset that gains value over time). So unless you buy at the absolute worst prices, you’ll be able to sell your house for a profit some years later more often than not. Plus, if you own more than one piece of real estate, you can earn some extra by renting that out.
Education loans are also considered to be good debt. And if you want to get into a field that requires going through a proper education like engineering or medical sciences, if you have to, you should use debt. Only because that helps add value to you and you can leverage that degree. But if that’s not the case, getting into debt just to have an institution’s name in your resume does not make sense to me. You can be working all that time instead and figure out what you really want to pursue during that time.
But, to each their own, these are just my views on these different types of debts and if they’re good or bad for us. Please understand your own financial situation and figure out what makes sense to you and what doesn’t. Meanwhile, you can more articles from me here. And do let me know if you want a specific topic covered. Subscribe for free to receive more posts like this every day!