Good Debt vs. Bad Debt

By definition, the word debt simply indicates an extension of money to a person from a second party. It implies the intention to repay the monies lent at a future date as specified in the repayment terms. Although, this is an accurate description of what debt means it fails to indicate if all debt falls in the same category.

Purchasing anything will incur to the buyer a debt. In some cases, that debt is reimbursed instantly and both parties will conclude the transaction. However, in most cases the buyer will not have sufficient funds or wishes to forgo paying off the debt the same day. This is called financing where the buyer elects to pay off the debt on periodical basis. The true question matters only about what the buyer just purchased. The item could range from a house to a nice watch. Some of these items will depreciate over time and others will appreciate.

Good debt follows the purchase of an asset that renders passive income and bad debt causes the buyer to finance something that loses value faster than he is able to pay off the loan. A vehicle is perhaps the most common liability we all finance that does not return any money in most cases. A vehicle has routine maintenance and the occasional trip to the shop that costs money. A taxi driver turns this liability into an asset by actually making money from his vehicle. This is not a possibility for most people but it does prove that if you are not making money from a purchases, it is not an asset and not good debt. If there is no alternative to going into debt to purchase a vehicle, for instance, buy something inexpensive and perhaps even ten years old. The sporadic visit to the shop in many cases proves to be much less than paying a brand new car payment every month. The golden rule is to never pay interest on an item that loses value. Paying interest on something that appreciates is a step in the right direction.