Good Debt!

Can a DEBT be GOOD? Yes it is!

For Creditors all secured debts are Good Debts and for Debtors Good Debts are those which builds wealth over the long run.

Question: Can Debts build wealth?

Not all debts are bad. If used precisely Debts can be huge source in wealth building. Good Debts can be considered as a sort of investment, which generates
income at a later stage.

Good Debts is secured with a valuable asset, like a home mortgage or, perhaps, a car loan, and so considered an investment.
Home loans are good because over time a home’s value increases. Student loans are also considered Good Debt because they are also like an investment. Students who graduate with a college degree earn, on average, higher incomes than those that don’t.
Home loans and college loans are good for another reason: they usually have very agreeable terms. Both types of loans come with very low interest rates, and borrowers repay the debt over a long period. The typical home loan, for instance, carries a 30-year term. The interest on college loans is so affordable that the graduate can repay their loans slowly over a long period as they gradually earn more money and build their personal wealth.

"Mortgage debt is Good Debt. You're borrowing money, but you're getting a tax advantage and can write off interest on an asset that's appreciating over time. Plus, you get to live there."

One of the secrets, therefore, to being smart with your money is to differentiate between Good Debt and Bad Debt.

1) Good Debt: Having a mortgage, getting a home equity loan or line of credit to fund a home renovation or remodeling job.
Bad Debt: Borrowing money to trick out your car to impress your friends, or just yourself.

2) Good Debt: Getting student loans to attend college.
Bad Debt: Using your credit cards while at school to buy groceries, throw parties or accumulate stuff. Many students are saddled with insane amounts of debt after they graduate. Average credit card debt after graduating from college: $3,000.


3) Good Debt: Leverage in real estate or using the bank’s money to invest in real estate. You can use leverage by borrowing funds to get into real estate investing with the expectation of turning in a profit.
Bad Debt: Leverage in Wall Street or borrowing money to buy stocks. In my opinion, buying stocks on margin is a bad idea. This is a subjective opinion because I’m sure there are a lot of successful margin players out there. As an average investor, I’d avoid trading on margin like the plague. There’s a difference between using a loan to invest in real estate versus investing in the stock market: if the real estate market drops, you are not forced to pay off a mortgage in short notice. With a drop in stock prices, you’ll be subject to margin calls that will force you to raise more money to hold on to your position or else force you to redeem at poor market prices. Using leverage takes a good amount of risk, the question here is if the risk is reasonable and if you’re fairly comfortable taking it.


4) Good Debt: Applying for a business loan and borrowing for business. Many ventures need cash flow that they don’t have at the moment to run their operations or expand their facilities. Using loans to grow a business is a sensible approach to take.
Bad Debt: Using your credit card to go on vacation, travel or to just have a good time; borrowing for pleasure. Once the vacation is over, you’re left with fun memories and a financial obligation to pay up.

While the differences often seem logical, it is a logic that is apparently missed by many people.

Therefore, Good Debt helps borrowers by increasing their wealth and by building a healthy credit history. Borrowers who repay their debt diligently earn a good credit score and become eligible to borrow more good debt in the future. Good Debt is investment debt that creates value.