What is Good Debt vs Bad Debt

Access to credit and strategically borrowing money can help many people achieve a higher quality of life. The right loan could be the difference between getting a degree and starting a career or feeling stuck in a dead-end job. However, debt can also be dangerous and keeps some people from achieving their personal or financial goals.

What makes a debt a good debt vs bad debt? The answer varies depending on who you ask, but it could come down to why you’re borrowing money, how much you’re borrowing, and your cost to get a loan.

What is good debt?

Whether or not a debt can be considered a good debt or bad debt will depend on your individual financial situation, and you may want to talk with a financial planner before deciding whether to take on new debt. Generally, when people discuss good debts, they’re thinking of a loan that will eventually create more value than it costs. These good debts could include:

• The money you borrow to invest in yourself or increase your earning potential, such as a student loan.
• Loans to make necessary purchases for everyday life, like an auto loan or mortgage.
• When you have enough cash, but you borrow money at a lower interest rate than you expect to earn on your savings or investments.

The specifics of a situation can also impact whether the debt is considered good or bad. For instance, taking out a large loan to buy a luxury car might be considered bad debt. However, a loan to buy a used vehicle so you can get to work might be considered good debt.

Are mortgages good debt?

Mortgages are often considered good debts because you need to live somewhere and you’ll either be paying rent or a mortgage payment. Also, since your home may increase in value over time, you could make money in the long run.

What’s bad debt?

Bad debt is generally debt that’s taken on for unnecessary consumer purchases, excessive debts, and high-interest debt.

A bad debt could be credit card debt from shopping sprees, or high interest payday loans.  Payday loans typically have short repayment terms, usually just a couple weeks.  This makes the loans difficult to repay and often lead to the loan being rolled over into a new loan.  This just increases the amount you owe and leads to a cycle of debt that is hard to break. 

Are student loans good debt or bad debt?

Student loans are a type of loan that is used to pay for your education. They can be a good option if you need to borrow money to pay for college or graduate school. However, student loans could also be considered bad debt if you borrow too much money and are unable to repay the loan on time.

Can you transform a bad debt into a good debt?

While you can’t necessarily turn a bad debt into a good debt, you may be able to take advantage of lower-cost debt that can help you pay off your more expensive debts.

For instance, if you’re struggling with payday loans, taking out an installment loan with a lower interest rate, manageable payment schedule, and funds to use to pay off your payday loans could be a wise financial decision.

Your credit score and overall creditworthiness may limit your loan options, though. RISEcredit.com is an online lender for the millions of Americans who may not qualify for a loan from other financial institutions. We want to help our customers with the cash they need today, and work with them as they build a better financial future. That’s the RISE difference.  Learn more and find out if a RISE loan could be a good fit for you.