Three Kinds of Good Debt

When it comes to personal finance, most people don’t know that much. You start to notice this when you read personal finance media that’s geared toward the general public. These TV and radio shows, blogs, and websites often try to communicate the most basic principles in just a few words, because most people aren’t going to take a lot of time to think about this stuff. Because the concepts have to be distilled so much, a lot of the nuance can be lost in the process.

One example is debt. The average personal finance talking head communicates thoughts like “Debt BAD! Saving GOOD!”. And while both statements are (sort of) true, there are exceptions and differences in understanding that make such statements irrelevant. Statements like these are supposed to protect people from their own ignorance. If someone takes on debt recklessly, they’ll be in trouble. Putting fear of debt into someone keeps them safe (sort of).

The problem is, there are plenty of examples where taking on debt is a good thing, in the best interest of the borrower. From a financial perspective, there are numerous situations in life where a person will not be able to make the most of their financial situation without borrowing. Financial institutions and governmental legislation collude to make this borrowing among the most affordable on the earth, among other benefits. Quick and easy loans are available, and they can be a very good thing. Here are a few examples.

Mortgage Loans. Buying a home is one of the best ways to build wealth. Most people don’t have enough cash on hand to buy a home outright. So they have to go to a bank or other institution to borrow the money. The government likes homeowners. Homeowners pay their taxes, buy stuff, and generally don’t cause trouble. So the government helps make mortgage loans really cheap. What’s more, homes tend to appreciate in value 4-6% per year. If you’re only paying 3.5% APR on your loan each year, you’re actually growing wealth faster than you’re losing it. This is an amazing example of “good debt”, even if you are $200,000 in the hole for your new house.

Business Loans. As above, the government loves strong businesses. They are essential to the economy, job creation, personal autonomy, that sort of thing. They subsidize business loans and make it possible for new entrepreneurs to take a huge risk on a new business, without having to put their personal assets at risk.

Student Loans. We all know that lots of Americans took out student loans only to find that they couldn’t get a job and pay them back. This doesn’t make them bad. Student loans are a great way to invest in yourself. Like the examples above, the price of student loans is kept artificially cheap, as the government subsidizes the education of its citizens.

These are great examples of good debt. It’s not consumer debt – simply borrowing money to add new pleasures to your life. It’s affordable because these things are likely to make you a better citizen and increase your financial responsibility.

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