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Our society is carrying way too much debt. We're drowning in it. It's no surprise that studies reveal debt is a destructive force on society, marriages, and even individual health and well being.(1) Yet, in personal finance there is a concept of good debt and bad debt.
Good debt? In most people's minds, debt is usually "bad" or worse, but in the area of personal finance, there are the concepts of "good debt" and "bad debt".

WHAT IS GOOD DEBT? Good debt is widely accepted to be debt that creates value or produces wealth in the long run.(2) Factors that might also push debt over to the "good" side are whether that debt is tax deductible, or will help reduce currently existing "bad" debt.

Debt that creates value might include student loans, real estate loans, business loans, and purchase of income-producing equipment.
Student loans: These create value by contributing to the life-long earning power of the borrower.
Mortgages: Used to purchase property which generally appreciates over time, these create value well beyond the cost of borrowing.
Business loans: An entrepreneur with a good business plan can find it difficult to start a profitable business without financing the start-up costs.
Equipment Purchases: Many businesses or individuals would be hindered from growth and increasing profits without the ability to finance the purchase of equipment needed to produce income.

Debt that is tax-deductible is less expensive than other forms of debt because the interest paid is partly offset by the tax benefit received. A debt consolidation loan which effectively reduces the interest paid and the length of repayment may be considered "good debt" because it creates value by reducing debt; building wealth over the long term.

WHAT IS BAD DEBT? Anything purchased with debt that immediately loses value is considered to be bad debt.(3) So, debt to purchase something that has no potential to increase in value; like a toaster, or a pair of sneakers, would also fall into that category. Purchasing disposable or consumable items, like diapers, groceries, or eating out on credit is always "bad" debt if it is not paid off within the same billing cycle. An easy rule of thumb is, "Any debt that will outlast the item it is used to purchase is bad debt".(4)

AUTO LOANS. A harder purchase to evaluate is buying an automobile on credit. A brand new car is generally "bad debt" because it loses value just by driving it off the lot. Buying a needed car to get to and from work, or one that has decidedly

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