Good Debt Vs. Bad Debt

Consumer debt has increasingly become a problem for the average consumer in the United States. Debt can be used in both good and bad ways, but many consumers misunderstand the idea of good debt verse bad debt.

Bad Debt

Bad debt is debt that is carried on any item that goes down in value after you pay for it. For example, if you finance a purchase of a new car, that car will never be worth what you paid for it before you drove it off the lot. In some cases, the car even drops thousands of dollars the second it is driven off the lot. Electronics are also a good example. If you financed the latest big screen television on the market, this would also be an example of bad debt. Not only is the item that you bought going down in value, but you are paying interest on that item. Everyone likes nice things, but the smarter approach to buying these types of items is to pay cash. If you can't pay cash for these items, you can't afford them.

Good Debt

Debt can be used for purposes that have the chance of creating value. A home loan is a good example of good debt. A home has the potential of increasing in value if the market is right. In addition, there are tax advantages to owning a home. For this reason, it sometimes makes sound financial sense to take out a loan on a property. Business loans are another example of debt that could be termed "good debt."