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Can some debts be a good thing while others are not? One way to decide is to ask yourself the question, when the debt is finally paid, will I have anything of real value?

When you went to college, you might have worked part time, scrounged all the scholarship and grant money you could lay hands on and still had to borrow thousands to pay for your education. Ten years down the road, you're finally out from under that loan. You're a respected professional because of your education. Are you better off? Didn't that loan buy something of lasting value? You bet it did! And that's the key difference between good debt and bad debt.

The best example of good debt is the purchase of a home. It's hard enough to save the down payment, let alone hundreds of thousands of dollars cash. A mortgage is the only way most people could ever afford to own their own home. When that 20 or 30 year mortgage is finally paid, you'll have a valuable asset indeed.

The concept of good debt vs. bad debt is quite simple. A good debt is money borrowed in hopes of building future wealth. A bad debt is just the opposite. Bad debt is spending future wealth today, spending for "stuff" that gives you gratification, but loses value the minute you walk out of the store.

Buy that HDTV with a high interest consumer loan and you'll not only pay two or three times the selling price when you factor in all the interest charges, by the time you've paid for the TV, it's likely to be gone, rotting in a landfill.

Is a car loan a good or bad debt? Well, it's definitely not a good debt, because a car is a cost, not an asset. But it's a necessary cost and not many people can afford to buy an automobile without taking out some sort of loan. Let's just say that cars occupy a grey area between good and bad debt and call a car loan necessary debt.

Anytime you borrow money, the interest you pay is the cost of using that money. If debt was simply a matter of repaying over time without interest, the difference between good debt and bad debt wouldn't be as much a concern.

If you use other people's money to buy an asset, something that will hold and even grow in value over time, you are building wealth.

If, on the other hand, you use borrowed money to buy a commodity that will wear out and lose value over time, you are spending your future wealth. What makes this practice especially dangerous to your financial well being is the high rates of interest you pay is money wasted that could have been invested. Does it really make any sense to buy something that will be tossed aside in a few years and pay as much (or more) in added interest charges than the cost of the item itself?

Learn more about this author, John McDevitt.
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