Have you ever heard of the term “good debt?” No? Isn’t it paradoxical to say good debt?
Good debt, if there ever was such a thing, would include things such as loans with low interest rates. A cheap home loan would be one of these. In this real estate market where property prices are increasing every day, a low interest home loan can be considered good debt. With the value of the home appreciating , the cheap home loan would, over time, be increasing your wealth.
Bad debt includes credit card loans and loans taken out to pay for items that your cash reserves can’t cover. Why bad? Because the item you’ve just bought (cars are definitely high up in this list) begins to depreciate and lose value immediately you buy it while the loan you’ve taken to pay for that item begins to accrue interest immediately you take the loan.
To be frank, debt is debt after all, whether we call it “good” or “bad.” We still have (or rather should) pay for it. No one daydreams about having loads of debt, no matter how “good” it is. Debt isn’t built to be this wonderful thing that we all long for.
We would rather call the two categories then, “better debt” and “worse debt.” Better debt used to buy an appreciating asset while worse debt is used to satisfy our appetites in depreciating assets. So if you must quench the thirst for that new phone with an 8 megapixel camera, 4.8 inch super AMOLED capacitive touchscreen, a 1.4 GHZ processor and loads of battery life, do not take up debt to pay for it. No matter how cool the phone is, it loses value immediately you pay for it. Save for it. An apartment in a growing area in a city where the property market is looking promising and you don’t have the cash on the other hand, maybe.