Good debt vs bad debt | Columbia College

Good debt vs bad debt | Columbia College

October 5, 2019 0 By Stanley Isaacs


Good debt vs bad debt. Debt is always a bad
thing, right? Not necessarily. Debt is when you owe something to someone else. This could
be as little as owing your friend $10 or having a loan for a new house. All debt has its risks,
but sometimes the result are worth it. So what is good debt? There are three characteristics
of good debt. 1.) It appreciates, or increases, in value. 2.) The asset life, or the length
of time you have the asset, is longer than the loan. And 3.) There is positive financial
leverage. This means the benefit of the asset is more than the cost of the debt. For example,
if you buy a house the value goes up over time. If well maintained, it should last longer
than the life of the loan and depending on the real estate market, you should be able
to sell the house for more than you paid for it.
Bad debt is a little easier to recognize, because we have all heard the warnings about
it. There are also three characteristics of bad debt. 1.) It depreciates, or decreases
in value. 2.) The asset life is shorter than the loan. And 3.) There is negative financial
leverage, or the benefit of the asset is worth less than the cost of the debt. An example
of this is using financing to pay for furniture. There are usually higher interest rates, you
can’t typically sell furniture for more than you paid for it, and sometimes it doesn’t
even last the length of the loan. Now that you know the difference, it is easier
to recognize what is good or bad debt and make an informed decision.