Is ALL Debt Bad?

In the realm of personal finance, ‘debt’ often carries a negative connotation, synonymous with stress and worry. However, not all debt is detrimental. In fact, understanding the distinction between ‘good debt’ and ‘bad debt’ is key to effective wealth management.

Good Debt

Good debt is an investment that will grow in value or generate long-term income. Taking on debt for education is a perfect example. The idea is that the student loan would eventually pay for itself once the borrower lands a better-paying job thanks to the degree. Another example is a mortgage on a house, as real estate generally appreciates over time.

Bad Debt

On the other hand, bad debt includes debt incurred to purchase depreciating assets or goods. Credit card debt is one common example, especially when it’s used for purchases that lose value over time or do not generate long-term income. These debts carry high interest rates and can lead to a cycle of debt if not managed properly.

Auto Loan – Good Debt or Bad Debt?

An auto loan can fall into either category of debt, depending on the specifics of your situation. If the car is essential for you to generate income – for instance, you may use it to commute to work or use it in your business – an auto loan could be considered ‘good debt’. However, cars depreciate rapidly, losing a large portion of their value the moment you drive them off the lot. Therefore, if the purchase is primarily for luxury or if the loan has a high-interest rate leading to a hefty repayment amount, an auto loan could easily become ‘bad debt’. It’s crucial to carefully consider the necessity, affordability, and value retention of the vehicle before taking on an auto loan.

Understanding the distinction between good debt and bad debt is a crucial aspect of financial planning. It not only helps alleviate any negative sentiments associated with good debts, but also serves as a guiding principle for making wise decisions regarding borrowing and spending. This, in turn, contributes to the development of a strong and healthy financial foundation.

Anchored in Faith Wealth Management is not a registered broker/dealer and is independent of Raymond James Financial Service. Investment advisory services offered through Raymond James Financial Services Advisors, Inc.
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