Wednesday, February 24, 2010

Good debt vs. Bad debt

What is a debt? It has been said that there are two types of debt one which is good like Mortgage debt, student loan debt, loans to improve your business, lines of credit etc, which improves your lives and increase your finances and home occupation and then there are bad debts like car loans, credit card debts (the worst) payday loans and any thing with high interest rates and which does not increase your finances (although I have included car loans here because although it can increase your mobility, it does not increase your finances or improve your equity since it depreciates very fast).

But in this economy this notion of good debt and bad debt is holding only for people with enough means to manage it. Take for instance Mortgage debt, although being a good one since you are investing in a place to live in is becoming a burdensome debt to people who are struggling with unemployment and other debts. They have to think about whether to walk away from the house which can be underwater (or whose mortgage is more than the value of the house) or putting food on the table.

The same is happening with student loans, although a good debt since they are investing in their future in the hope that they will be able to find a good job and earn more money but these loans are getting very burdensome to these students who have to juggle a job, studies and maybe family obligations, so they also have to make a choice how to continue paying for college, either by taking out loans or skipping one semester, earn some money and then register for the next semester.

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