I have read numerous books and articles that detail the difference between good debt and bad debt. Television financial experts tell us that debt is not a bad thing. That its all about how you manage debt. We have been taught that good debt is borrowing money to purchase something with the expectation that the price will rise. Home mortgage loans, student loans and business loans are examples of good debt. Conversely, we are taught that bad debt is borrowing money to purchase something that will depreciate in value. Auto loans and credit card loans are examples of bad debt. I have a different point of view on debt. I think that there is basically no distinction between good debt and bad debt. All debt is bad debt. There is no such thing as good debt. Any form of debt is a liability that must be repaid. Debt can turn into an albatross that stays with you for years and years and years.
Money that is borrowed must be repaid at a specified interest rate regardless of the value of the purchase. There is no guarantee that an asset purchased through the use of credit will appreciate in value. There are countless examples of this type of situation. Individuals that bought homes during the housing boom because they believed that real estate could only appreciate in value. individuals that purchased stocks on margin because they believed that the stock market would only increase in value.
Am I saying that it is never worth using debt for things such as financing your education or purchasing a home? No, I just want us to rethink our views on using debt. Situations may arise where we have to use debt to pay for a necessity. But that still does not make it good debt. The only people that debt is good for are the lending institutions. Capital One, American Express, Bank of America and JP Morgan Chase are some of the biggest beneficiaries of our use of “good debt”. Sometimes I think about the headaches that I could have saved myself from by not relying on so called good debt.
I agree that all debt is bad for us, the consumers. However, folk like me would never have a graduate degree or be a homeowner without debt because I didn’t come from rich parents. Do you believe in secured loans for car purchases?
@Renee I agree that we may all have to use debt but we have become too comfortable with relying on debt. It should be a last resort. An auto loan is already a secured loan because you are pledging the automobile as collateral.
All debt is bad. I do not see the difference between the two.
Consumer debt is the worst.
I agree with Mark that it should be a last resort.