Good Debt Versus Bad Debt
Is Debt your four letter word? Something you fear, avoid, and regard as the route to all evil?
But what if debt is your saving grace?
We speak to hundreds of New Zealanders daily. We understand the challenges you face, and where your financial pitfalls often lie. We’re aware of how people aren’t always sure of the best way to approach debt, and the continual stress this places on their shoulders. So let’s look a little closer at good debt versus bad debt, what constitutes each, and when/if to make use of either.
What is good debt?
Good debt is regarded as an investment. This is when you purchase something that will grow in value, or holds the potential to yield an income over time.
A house would be a good example of good debt. Not only are you able to live in it, and so avoid paying rent, it is also very likely to appreciate in value, giving you a return on your investment down the line.
Home loans also tend to have a much lower interest rate. This is because the loan is secured by the house itself.
A student loan is often regarded as a good debt, as the theory goes that you are able to earn an income at a later stage once you have qualified. There are caveats to this of course, as a future income is not always guaranteed. Neither is your career enjoyment, and therefore your certainty that you’ll stay in the field that you’ve studied for.
A car loan is another example of a loan that could be categorised as both a good debt and bad debt. On the one hand, it is regarded as a bad debt as it depreciates. The value of the car lessens over time, and so you are unlikely to make more on it than you pay into the loan.
However, if the car is used for doing business and helping you to earn an income, then it can be categorised as both a good and bad debt.
Is a bad debt bad?
The simple answer is ‘ no’. ‘Bad debt’ is debt that is incurred to purchase something that has little or no financial value. (This does not mean of course, that the debt does not redeem itself in value in other ways. For example, a once in a lifetime family holiday, or a wedding – these are likely to hold enough personal value to yield a return on investment in other ways.)
Credit Card Debt Management
Credit card debt is often regarded as ‘bad debt’, because of the comparatively high interest rate. Credit card debt consolidation and management is often advised as a credit card debt solution. It’s generally a good idea to apply for a credit card debt consolidation loan, as this is likely to carry a lower interest rate than a credit card. It’s also easier to manage and pay off a consolidation loan than it is on a credit card.
Of course a debt-free existence is something we all strive for, but the reality of modern life is that we cannot always pay cash for our house, our car, our children’s education, etc. It’s important to manage your finances carefully and choose your debt wisely, taking advantage of the options we offer you so they work well for you.
Takeaways from ‘Good Debt Versus Bad Debt’:
- Consider a debt consolidation loan for your credit card debt, as you’re likely to pay less interest on the loan.
- Regard a car loan as a good debt when the car is required for you to be able to work and earn an income.
- Speak to the team at NZCU South to know which of our services work well for your circumstances, and to know how we can help make your money work harder for you.