What is the difference between Good and Bad debt?

All debt is basically the same, however, debt can have good or bad consequences.

In it’s simplest form, Good Debt can be summarised as “Spending money to make money“. When the debt you take on generates income and builds wealth it is typically considered “Good Debt”. In other words, if you took on the debt to purchase something that will increase in value, and can contribute to your overall financial health, then it’s possible that debt is a good one.

Typical examples of good debt can be property investment loans, your home mortgage and even student loans. It entirely depends on whether the loan expense is outweighed by the returns achieved by the asset you have purchased with that loan. Is the purchase/ investment made with the aim of the value of the property appreciating significantly over time to cover the initial cost of the property, as well as the interest payments incurred during the time the loan is being paid off? If so, then this is good debt.

Bad Debt is generally debt incurred to purchase things that lose their value and do not generate long-term income. Another significant factor of bad debt compared to good debt is that that it usually carries a high-interest rate, such as credit card debt. “Payday” loans and cash advance loans are also examples of what is considered bad debt and if possible, to be avoided.

As mentioned, debt is not intrinsically Good or Bad, the consequences of incurring that debt that determine whether it is or not.