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Good debt vs bad debt

January 5, 2024
4
min read

At first, being in debt might seem like a bad thing - but in the right circumstances, debt can work to your advantage.

Couple looks at debt on laptop

It’s a phrase you may have heard before: There’s good debt, and then there’s bad debt.

So, what separates the “good” debt from the “bad”?

It all depends on the goal of the debt.

If you take on debt to buy an asset that appreciates, like a house, your asset may eventually be worth more than you paid for it. That means in the future, the debt will turn into profit.

Other assets may not appreciate, but they add value to your life in other ways—like a car that you use to drive to work or visit family.

Some types of debt only set you further behind in attaining your financial goals. In general, bad debt is any loan that you can’t afford to repay.

Is there any truth to the idea of good vs bad debt? Let’s take a closer look to better understand when debt can work in your favour:

Types of debt

To find out what kind of debt you’re taking on, you can ask questions like:

  • What is the cost of this debt? In other words, how much will you pay in interest over time?
  • What purpose does it serve, and does it add value to your life?
  • Can you afford to pay the debt back?

Here are a few examples:

Mortgage

Mortgage debt can be beneficial for two reasons:

  • Rather than paying rent every month, you’ll build equity in your home.
  • The value of a house tends to appreciate over time. Even though you’re paying interest on your mortgage, the house may be worth more than you initially paid for it by the time you sell it.

But no type of debt is objectively “good” or “bad” in all situations. Take mortgages for example: Getting a mortgage that’s more than you can afford puts a strain on your financials.

That’s why it’s important to meet with an advisor and find out how much house you can afford. When you’re ready to take on your first (or your next) mortgage, we can help you buy a home.

Student loan

Getting a student loan for your post-secondary education isn’t a debt you can measure the same as a car or house. Education is not a physical asset, so you may have a harder time gauging the value of it.

Think of it this way: Furthering your education can help you get a better-paying job that helps you generate more income. In that sense, student loans can be a form of good debt!

Car loan

Even though cars depreciate over time, they serve another purpose: Transportation! If you need a vehicle to get around, buying a car may be a non-negotiable purchase for you. This adds value to your life beyond its monetary worth.

However, it’s still important to buy a car that you can afford, so you don’t put too much strain on your budget. Learn more about the basics of budgeting.

Credit cards & lines of credit

Used responsibly, credit cards can be a great borrowing tool; they allow you to better manage your cashflow and cover large expenses.

But if you spend more than you can pay back, you’ll end up paying significant interest charges. The flexibility of a credit card can easily lead you into debt.

What’s the difference between a credit card and a line of credit?
A credit card is unsecured, which means it’s not secured by an asset you own (like a car or house). That’s one of the reasons why the interest charged on any outstanding balance is so high.

A line of credit is secured by an asset. This gives your financial institution more confidence that you’ll make your payments—because if you can’t, they could seize your asset.

As a result, lines of credit have lower interest rates than credit cards

If you find yourself stuck with credit card debt, there’s another solution:

Debt consolidation

Consolidate multiple sources of debt into one with a Payoff Loan. Since this can lower the amount of interest you pay, it can end up saving you thousands of dollars, and you’ll pay off your debt sooner!

We can help you manage your debt

The decision to take on debt is a personal one, and the right choice for you depends on your unique financial situation. Luckily, it’s not a decision you have to make alone.

At Cambrian, we’re here to help you reach your financial goals, whether that’s buying your first car or paying off high-interest debt. Book a meeting with an advisor to learn more about the debt solutions we offer!

Today’s Rates

*All rates and yields subject to change without notice.
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