Is Debt Ever a Good Thing

Debt, debt, debt. That’s all one here’s about these days, especially during these inflationary times. And for good reason: people are increasingly pulling out the plastic to help deal with high prices, during a period when wages are lagging and interest rates are high, rendering indebtedness even more expensive.

Yes, we know that having too much debt – of the wrong kind – is bad. But we wonder: is debt ever a good thing? Let’s check it out.

The Issue

There aren’t many terms that carry as negative a connotation as does “debt.” However, it’s unfair, and even inaccurate, to lump all balances together. As it turns out, debt can be a positive, if it dovetails with wise decisions and good money management, that is.

You Mean Some Debt is Good?

Precisely. Good debt is the kind that provides you with something that has long-term value and either heightens your net worth or helps you produce income.

Good debt can help you attain life goals, such as buying a house or graduating from college. Most of us can’t just shell out cash for those expenses. Of course, every investment carries risk. Your home’s value could drop, for example, or for some reason you had to leave college well short of a degree.

On the other hand, it’s a bad idea to go into debt for, say, a ginormous TV, a pricey vacation, or even an extravagant dinner out.

What Counts as Good Debt?

Student Loans. Things are looking up — now that President Biden has slashed individual student loan debts by $10,000. In any case, while having a sheepskin is not guaranteed to land you a great job, or any job, for that matter, studies have long indicated that a degree can, over time, increase your earning power. Last year, the median annual income for bachelor’s degree holders ages 22-27 reached $52,000. That’s compared to $30,000 for high school graduates of the same age group.

Home mortgages. You never know about the housing market, in which home values change all the time. However, historically, and over the long haul, home purchases have been solid investments. In 1990, the median price of a home in the U.S. was $79,100. Some 32 years later, the median home price is $248,857. For many people, their home constitutes most of their net worth.

Business loans. If not for a loan, you likely could not ever have launched or expanded your start up, which is now growing your income. Sure, there’s an inherent risk in starting any business, but with careful planning, one can mitigate such risks and truly succeed.

What About Car Loans?

There are nearly as many perspectives about this as there are car models, but such loans probably fall somewhere in the middle. Yes, new vehicles do depreciate, beginning the minute they roll off the dealership lot. However, if you need a dependable vehicle for, say, a long work commute, and a $3,000 used ride just won’t do, then a car loan is a good investment.

Car loans can also be “good” in that they typically carry low interest rates. The current rate for a 48-month new car loan is 4.87 percent. Meanwhile, the average annual rate in the U.S. on a 30-year fixed-rate mortgage – another “good” debt — in 2019 was 3.94 percent.

By contrast, the average median APR for credit cards – bad debt – is 21.74 percent, according to Credit card debt is why so many people need debt relief, by the way. Look at all the debt settlement tips for Texans, for instance. They’re no surprise, considering that many residents of the Lone Star state are sinking in debt due to high credit card utilization.

A Fine Line

There are times when even good debt can sour if you bite off more than you can proverbially chew. For instance, it’s not an ideal situation if your mortgage payment swallows half your paycheck, or if you’ve taken out nearly a quarter of a million dollars to get a degree in an arcane – and non-lucrative – academic field. Ultimately, yes, debt can be a good thing. Just be certain to line up your debt with your objectives, borrow only what you can afford, and keep your debt-to-income ratio as low as possible.