There are many people out there that say there are two types of debts: good and bad. Depending on who you listen to, good debt can mean carrying a loan for a home, an auto, or education. Bad debt can mean carrying a balance on your credit card.
According to this CNN Money Article:
Good debt includes anything you need but can’t afford to pay for up front without wiping out cash reserves or liquidating all your investments. In cases where debt makes sense, only take loans for which you can afford the monthly payments.
Bad debt includes debt you’ve taken on for things you don’t need and can’t afford (that trip to Bora Bora, for instance). The worst form of debt is credit-card debt, since it usually carries the highest interest rates.
Take a step back using common sense and think for a minute: How can any debt really be good? You’re slaved to the lender! Plus, you’re most likely paying interest on the item. I know, your daily commute back and fourth to work would cease exist without that brand-new Infinity G37 convertible; taken out in a loan of course! Trust me, that guy riding next to you in his 10+ year old, paid off beater car probably sleeps better at night. Why you may ask? He’s not worrying about how he’s going to pay the loan next month!
I had an auto loan once on my sedan and I absolutely hated it! In fact, I hated it so much that I paid it off in less than two years. After this, I have never felt the same way about loans again. According to my final auto statement, I spent wasted over $894.83 in interest over the life of the loan! That’s $894.83 lost for a vacation, investing, or anything really. My next car will be used and bought in cash – not a loan!
My next battle with “good” debt is my student loans. Since 2006, I’ve spent wasted $1,520.48 in interest payments and counting! I have roughly $14,000 left on them and I’m looking at different avenues to pay it off in less than two years. As it stands right now, I am on track to pay them off in about 4 years. It’s going to take some cutting back, but once I send in that final payment, it will be worth all the sacrifices made to get there.
I know we all need a stepping stone and this is where loans can help us out. Just a word of advice, try not rely on them your whole life. You’ll never be rich making payments to other people. Just ask your next door neighbor.