Good Debt

In simple terms, a good debt is one that is a sensible investment in your financial future, should leave you better off in the long-term and should not have a negative impact on your overall financial position. You will have a clear and specific reason for taking it out, and a realistic plan for paying it back that allows you to clear the debt as quickly as possible, or in a series of regular and affordable payments (eg for a mortgage). Someone with a good debt will also have identified the cheapest possible way of borrowing that money. They’ll have done this by finding the borrowing method, an interest rate, loan or credit amount, term and charges that are the most appropriate for them. In some cases it will mean a deal with the lowest possible interest rate, but in others it might not. For example if the lowest rate comes with the price of high charges or penalties. Examples of good debt Here are some examples of how taking on debt could actually make you better off in the long run: Student loan: taking out a student loan to pay for university will help you become a graduate. This is a good investment because university graduates typically get paid more than non-graduates and, more importantly, because the interest rate is relatively low and you only have to repay the loan once you’re earning more than a certain amount. Mortgage: a mortgage can be a good debt, because it will enable you to purchase a home to live in. Once that mortgage is paid off, that home will be a big financial asset, which is likely to grow in value over time and the monthly mortgage payments could be cheaper than rent. Investing in your own business: a loan to help you develop your own business can also be a good debt, as long as you have a sensible and realistic business plan. If your business does well it will end up being worth far more than the loan you originally took out. Buying a car you can afford: if it is essential to enable you to get to work and earn a living. However it’s important that you can afford the loan repayment costs and the running costs of the car out of your income.