What Is Good Debt?

Anelle Valdes
Anelle Valdes
a person reads a debt collection letter

What Is Good Debt?

When most people think about debt, there’s only one consideration: avoid it at all cost. But that’s not entirely true. Some debt is unavoidable or even desired, and so-called good debt can help you increase your net worth or your earning potential, which is something that lenders consider when you’re looking for a loan or applying for a new credit card.

Generally, good debt falls into one of two main types.

The first increases your net worth, such as with a home mortgage an auto loan. Yes, you may have a sizable debt until you pay it off, but you’re working towards ownership of an expensive asset with real value, such as a home or new car, and lenders are more forgiving of debt of this type than debt that is purely an expense.

The second type of good debt is seen more as an investment in your earning potential, such as a student loan or any other type of loan you take out to broaden your skills and increase your value in the workplace. While some loans may be more desirable because they have lower interest rates, any sort of certification or continuing education is a great way to take on good debt and build your credit.

Another type of good debt is a business loan, which is a loan that you can use to invest in the future of your business. Whether you’re just starting out and you need to build out a store or hire help, or you’re looking to take that next big step with a significant expansion, the debt you accumulate while you’re growing your business is seen as good debt, not bad, in the eyes of lenders and creditors.

On the other hand, bad debt would be the product of an elective purchase, such as a vacation, a huge, 70-inch TV or splurging on fancy dinners three times a week. This kind of debt isn’t going towards an asset or anything of real, substantive value, and therefore it fails the good debt test. It’s also not directly increasing your earning potential or adding to your skill set, so lenders won’t look too kindly on someone with tens of thousands in credit card debt with no viable way out.

Good Debt Exceptions

But not all asset-driven or forward-looking debts are necessarily good debts.

If you buy an expensive new car and try to sell it a few years later you’ll see what we mean. Depending on the terms of your loan and how much you put down, you could owe more than the car is actually worth due to depreciation, which means you’ll still owe money even after you sell it. That said, car loans do typically have low interest rates, which can be half or a quarter of an equivalent credit card rate.

Medical debt is another grey area. It’s not necessarily elective, meaning you don’t really get to decide when and if you’ll go into medical debt, but it’s not great, either, as some medical debt can be significant and affect a person’s ability to pay their debts for years to come. The good thing is that medical debt doesn’t carry an interest rate, which means every dollar you spend goes directly towards what you owe, not fees and interest.

What about no debt?

To say it’s impractical to live without debt today is an understatement. If you want to go to college, buy a car or own a home, you’ll need to take on some debt. The good news is that lenders realize that there are some debts that pretty much everyone has, and these good debts won’t count against you when you apply for a loan or a credit card. In fact, debts like a mortgage or student loans could actually help you when it comes time to secure your next loan because it speaks to your overall career and life goals, and you’ll likely notice lower interest rates and higher loan amounts when you have good debt.

Good debt can also be a great way to build a credit history, especially if you’re applying for jobs or looking for an apartment to rent. Pretty much everything these days requires a credit check, and your next job or place to live is no different. With bad credit, your application may not even be looked at, which can make it hard to move forward financially. By smartly managing your good debt and reducing your bad debt, you can actually enhance your financial situation in ways that you can’t do with no debt at all.

When Good Debt Becomes Bad

It’s true that even good debt can become bad debt if you take on too much or if you let the debt you have spiral out of control. Indeed, a home mortgage can go from good to bad debt if you lose your job and can’t make your payments or if a variable interest rate starts sucking up all of your income. Even a degree from a prestigious university can turn into a bad debt if it doesn’t help you advance your career or increase your earning potential.

Wise Loan Can Help

If you’re having trouble securing a loan to help pay for the things you need, we can help. Contact us today to see if you qualify for a quick, same-day or next-day loan. It only takes five minutes to apply, and we’ll make a decision within minutes of your submission. Most deposits are made within 24 hours, and you don’t need good debt, good credit, or anything like that to apply. There are no hidden fees and easy approval means you won’t have to spend days or weeks to hear back. Get approved today and take control of your debt with Wise Loan.

The recommendations contained in this article are designed for informational purposes only.  Essential Lending DBA Wise Loan does not guarantee the accuracy of the information provided in this article; is not responsible for any errors, omissions, or misrepresentations; and is not responsible for the consequences of any decisions or actions taken as a result of the information provided above.

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