Whenever you hear the word debt it usually invokes a negative reaction. This is easy enough to understand these days with entire corporations, even countries, going bankrupt. However, when carefully selected and used only when necessary, debt can be very beneficial. Here is some debt advice on how to recognize when you can consider debt good.
Good Debt Situations
The easiest measure of whether debt is good or bad is to evaluate the value of the goods or service once the debt is repaid. If the value of the item is greater than the total value of the loan principal and interest, then you have good debt.
Student Loans are Good Debt
You can consider a student loan good debt. Student loans allow you to make money. If you have a nursing student loan of $30,000 you need to evaluate how much money a nurse makes in comparison to the total value of the student loan. If it means, in ten years, when the loans are repaid and your annual income is $60,000 then the value of your income has increased. Even if you end up paying twice the $30,000 principal, your annual income over a career of 20 years far surpasses the total value of the student loans.
Primary Home Loans Can be Good Debt
Another example of good debt is a primary home loan. Well, as least until recent situations during the home mortgage crisis in the USA when the value of home loans vastly outweighed the value of the home. When you are shopping for a home and a loan to go with it, ask your loan representative to estimate the value of the home once it’s paid off in 20 or 30 years. In fact, you may want to seek a second opinion from another reliable lending resource as to the value of the home at payoff. It may be hard to justify purchasing the home if, in the end, the home value isn’t near that of the total loan payoff.
Business Loans Can be Good Debt
A similar argument can be made for a business loan that allows the company to expand, buy additional products to sell and put more people on the payroll. As long as the business value stays ahead of the total loan, then this is good debt. Business loans allow you to make money and create an asset that appreciates. Eventually the business can be sold for greater value than the loan plus interest.
Another example of good debt is a loan that charges simple, rather than compounded, interest. This makes it easier for you to pay off the debt early and keep interest charges minimized.