Nearly every client I do a financial review for carries debt in some form or fashion. Some of it is good debt, some of it is bad debt, and some is purely toxic. So over the next three weeks, I’ll show you a few examples that fall into each category.
This Week: “The Good”
There actually is such a thing as good debt. Here are four examples:
1. Mortgage Loans Under 4%
Very few people have the ability to save and purchase a home with cash. Therefore, taking out a mortgage is the best way to accelerate home ownership. Historically, loans under 6% have been considered good. In today’s low-rate environment, however, most loans should be locked-in under 4%.
2. Car Loans Under 4%
Car loans typically carry very low rates since they have collateral behind them (i.e. – if you don’t make the payment, the bank will come and take the car back). I consider auto loans with less than 4% rates as being good debt. With a good credit score, you can often get rates ranging from 0-3%, but even at 4% you’ll free up some cash to be used for other long-term investments like retirement savings.
3. Education Loans Under 5% That Are Advancing Your Career
One of the best investments you’ll ever make is in your own skills and abilities. That doesn’t mean you should seek a $200,000 degree when a $30,000 one will create similar career opportunities, but a degree is still a highly valued commodity. The caveat to education loans being considered good debt is determined by whether or not the degree has advanced your career as expected. Carrying $50,000 in student loan debts for a degree you’re not using simply cannot be considered good. However, reasonable student loans that helped you land your dream job are definitely a good investment.
4. Certain Business Loans
If you’re building a business, it might be necessary to take out a loan or a line of credit. If it’s in response to poor cash flow management or an obvious decline in the demand for your services, it’s probably not good debt. But if it’s being used for a well-calculated expansion, or to take advantage of a clearly identified opportunity, then business loans can be considered a good debt to carry.