Financial Success Guide

What is Good Debt, and Bad Debt?

Section 8 Module 3

Is there really such a thing as good debt? Of course — if taken in moderation.

Defining good debt

"Good debt" is typically defined as debt used to finance something that will increase in value in the future. Mortgage debt is a classic example: You get a mortgage to buy a house today, and in 30 years, when you've paid off that mortgage, the house could be worth two or three times its purchase price.

Other examples of good debt include student loans (because getting a degree vastly improves your future earnings) and business loans (because putting money into your business allows you to expand and increase future profits).

The beauty of good debt is that it's essentially an investment, just like a stock or bond. You're spending money now in the expectation of getting your money back, and perhaps some profit on top of that, at some point in the future.

And because you're spreading the payments out over many months or years, you can buy the item you're financing immediately instead of having to wait and save up enough money to buy it all at once.

Good debt tends to carry a relatively low interest rate in the single digits.