When is debt a good thing or a bad thing? That is something that seems to confuse many people. It can be both for many people. The most critical rule of thumb is whether it is for an asset that will earn value or not. The purchase of a home is usually a good thing. It will, in most cases, appreciate over the years and end up being worth more than you paid for it. Student loans are another loan for an appreciating asset. College educated people make multiple times more than most people without one. Others purchases involve appreciating assets as well such as some art and antiques.
When is good debt a bad thing? Many people made mistakes in real estate over the past few years. Many real estate markets throughout the United States were critically over inflated. People who could not afford a home loan payment got into homes due to poor lending practices. They could barely make their mortgage payment then lost everything with rising rates on adjustable mortgages. Much of it was due to people jumping into something they knew little about without having enough funds to cover them. When many of the overinflated real estate markets burst, more people found themselves with more mortgage than home value. That is when a good thing goes bad.
Student loans can be a bad debt as well. Everyone I know that has student loans is always saying I need money. Most people use those funds to pay for tuition and other expenses related to getting an education. However, some take out these loans to afford an extravagant Spring Break in some exotic locale. On the other hand, they use it to make their fraternity dues. These are just a couple of ways that someone can abuse a student loan. They end up paying for their beer and pizza well into their adult lives.
What are other types of bad debt? Many people run up their credit cards buying things that have no shelf life. This includes food, gas, beer, etc. If you consume it today, you will be paying for it for months or years to come. Car loans kind of meet in the middle. They are not for appreciable assets most of the time. They lose value and many people owe more than the car is worth for some time during their loan life. However, with a large enough down payment, that might not happen. Whenever you consider taking on a new credit card or loan, ask yourself why you need it. Can you save up the money and pay for it when you get enough?
