Think twice before you apply for any loan or take on debt. Will it help you achieve your financial goals? Will it generate income? Or will it make your journey to financial freedom even harder? Our advice is to take on good debt, which is the kind of debt that helps you increase your net worth or income.
However, any debt can be good or bad, depending on how you use it. For example, if you take out a cash advance for low credit scores and make timely payments to increase your credit score, that debt can be considered good. More so if you use that money to pay off high-interest debts or hold it in an investment account.
That said, here are some prime examples of good debt.
Student Loan Debt
This type of debt is mainly considered good, especially if they are federal student loans, because you’re getting it to gain a decent education. You’re essentially investing in yourself and your future because having a degree can provide access to better opportunities and income.
Regarding interest rates, student loans often have a lower rate and are usually tax-deductible. After graduating, you should aim to repay below 10% of your annual income after taxes. A student loan debt that is not responsibly paid becomes bad debt and can hurt your credit score. Not to mention that it can be a financial burden if you take years to repay it.
If you find your student loan debt overwhelming, you can look into repayment options provided by the government, such as income-driven repayment options and refinancing.
Small Business Loan
Borrowing money to create a business is also considered good debt. Many people want to start a business and be their own boss because it is psychologically and financially rewarding. However, you should also be able to do the work that comes with starting a business. According to the Bureau of Labor Statistics, an estimated 20% of new businesses fail within their first two years. That means one out of five businesses fails within this time frame, which is a huge percentage if you think about it.
Knowing this, you’ll be more likely to succeed in your business venture if you choose a niche you love and know about.
Home Mortgage Debt
Buying a home or property is a good investment; therefore, your mortgage debt is likely good debt. Additionally, other Americans think so as homeownership rates continue to increase. That said, you can get some of the lowest interest rates on your home mortgage if your credit score is good, and the interest can be deducted from your taxes.
When you own your home, your net worth is increased, and you can decide to sell your home decades later when its value has increased. However, before taking on mortgage debt, make sure that you’re financially stable enough to make the payments and that you research the property thoroughly because having a house that is declining in value is not a good investment.
When a car is necessary for you to get to work, then it’s considered a required or good debt. However, if you splurge on an expensive car with money you don’t have, it’s considered bad debt, especially since most cars lose their value over time.
Even good debt can be considered bad if you don’t manage your finances well. The key to having good debt is being resourceful leveraging other people’s money and being smart about your financial decisions.