Some Search for Sasquatch, We Search for the Mythological Good Debt

homes on a street in st. petersburg, fla.
Heather Comparetto/The Penny Hoarder

Good debt.

For a dedicated Penny Hoarder, there are few better examples of an oxymoron. It would be pretty hard to argue that it’s ever preferable to owe money than not to, in an ideal world.

But as you may have noticed, the world we’re living in is far from ideal.

Sometimes, debt is all but unavoidable.

But is it ever sort of financially sound to take out a loan… or is it always dangerous?

Good Debt: Is There Really Such a Thing?

The old rule of thumb to vindicate debt is a simple one.

“Good debt” is the kind that will help you make more money down the line.

By that account, student loans are A-OK because the degree they buy will, at least ostensibly, help you find a better-paying job than you’d be able to otherwise.

And a mortgage might be fine, too. Although it’s not ideal to pay interest, once you pay that loan down, you’ll have a valuable asset to your name that you otherwise might not have been able to purchase.

On the other hand, bad debt is the kind that doesn’t have the potential to remunerate itself.

“When you buy something that goes down in value immediately, that’s bad debt,” David Bach, CEO of Finish Rich Inc., and author of “The Finish Rich Workbook,” told Bankrate.

That might seem pretty cut and dried.

But when you can take out over $100,000 on a possibly useless (but not always!) English degree, are student loans firmly in the “good debt” camp? After what happened with the housing market in 2008, exactly how confident are you about that whole equity thing, anyway?

Unfortunately, in this imperfect world of ours, things are rarely black and white.

Should You Take Out That Loan You’re Considering?

As a personal finance blog, we’re not encouraging you to go into any kind of debt.

No matter what you’re after, it’s almost always better to save the cash to buy it free and clear.

But since we’re stuck here on imperfect planet Earth for the foreseeable future, we did the research to figure out which types of debt are the most justifiable.

Here’s what we found out.

Mortgages

Becoming a homeowner as soon as you can is well ensconced in the annals of traditional financial advice.

That’s because experts have long assumed homes were appreciating investments — that is, they end up being worth more than you bought them for.

But after the housing crisis in 2008 left many homeowners irretrievably bankrupt, some financial gurus have had second thoughts about this assumption.

“If you look at the history of the housing market, it hasn’t been a good provider of capital gains,” Yale economist and Nobel prize winner Robert Shiller told USA Today. “Capital gains have not even been positive.”

In plain English? According to Shiller, data shows that many homeowners may break even but earn little more than that by way of returns.

Nowadays, more finance experts acknowledge that the advisability of purchasing a house has a lot to do with your personal situation.

Obviously, you need a roof over your head. But depending on where you’re living and how much money you have to spare, it might actually make more financial sense to rent. (Curious about your own situation? Here’s a calculator.)

And by the way, if you do decide homeownership is right for you, you could always save to buy the house cash. Yes, it’s possible.                      

Student Loans

Talk about complicated.

We’d love to say it’s always a good idea to invest in your education.

But there are simply too many factors at play to make that sweeping statement. And in some scenarios — such as attending a for-profit college — taking out student loans might be anything but a smart move.

“Education debt is often considered to be good debt, because it is an investment in your future,” wrote Mark Kantrowitz, publisher of college and scholarship decision tool Cappex, in an email.

“But too much of a good thing can hurt you.”

For instance, even if you’re awarded a solid and reasonable financial aid package, it’s a waste of money to squander your loan refunds on frivolous purchases.

And even if you’re only borrowing money for tuition and bare-bones living, you could be in trouble if you don’t end up earning enough to pay it back in a timely fashion.

According to Kantrowitz, who has studied and written extensively about student debt demographics, “if your total student loan debt at graduation is less than your annual income, you can afford to repay the student loans in ten years or less.”

On the other hand, if your debt exceeds your annual income, it’ll be a lot harder to make the monthly payments on a standard decade-long repayment plan. And when you opt for easier-to-foot alternatives, like extended or income-dependent repayment, you’ll significantly increase your total interest charges.

You’ll likely also still be repaying your own student loans, he warns, while helping your children enroll in college.

Yikes.

Fortunately, you don’t have to go into debt to get a college education. And no, you don’t have to go into a STEM field if you don’t want to.

Don’t get us wrong: You’ll surely have to hustle, and you might have fewer options when it comes to picking your dream school.

But when you find yourself walking across that stage debt free, you’ll thank yourself for those sacrifices.

Auto Loans

Sigh. This one hits close to home.

As I wrote here before, several years ago, I signed a loan on a 2014 Jeep Cherokee I named Desiree. I was between two years of a grad school program that was not working for me, and I wanted to get out of town — and out of my own head — as quickly as possible.

I didn’t quite have the $20,000 asking price floating around my bank account, though.

So I took out the loan, hit the road, and didn’t look back… until I did. Cringing. I wished I’d stuck with my trusty, if hiccupping, beater.

It’s well known that vehicles depreciate — that is, lose value — as soon as you drive them off the lot. And after that fateful drive, it only continues, making it extremely unlikely you’ll ever get back what you paid for it.

Classic “bad debt.” Avoid if at all possible.

If you’re bound and determined to take out an auto loan, at least do yourself a favor and go for a used vehicle.

The depreciation rate on a brand new car is exponentially steeper, which means buying one, even for cash, is almost universally acknowledged as financially foolhardy. (Desiree had a measly 1,000 miles on her, but she still wasn’t new new.)

Credit Card Debt

If there’s one kind of debt that’s basically unjustifiable, it’s credit card debt — although that doesn’t stop us from racking it up.

According to NerdWallet’s 2016 survey, the average household with credit card debt has a whole heap of it: $16,748, to be exact.

Wondering how that number can possibly be so high? It’s because revolving debt really is that insidious.

Basically, high credit card interest rates mean you’re paying extra for every single thing you purchase with them.

For instance, that reasonable pair of $75 boots might end up costing almost $100 after accruing a year’s worth of interest — calculated at a not-at-all-unheard-of 24% APR.

It’s like a reverse clearance rack. No, thanks.

Of course, most of us are funding more than $75 indulgences with our credit cards. All too often, people use them to make ends meet or on non-negotiable, high-stakes purchases. Americans might foot high medical costs with credit or use it to pay bills when cash is running low.

Then you’re deep in the cycle: You can’t afford what you purchased, which means you certainly can’t afford to get ahead of the interest you’re charged. And before you know it, you’re almost 20 grand in the hole.

Our advice? Steer clear of credit card debt at all costs, and if you’ve already got it, prioritize paying it off.  

Of course, if you learn how to use rewards credit cards wisely, they can be a great financial boon. But you have to make sure you pay off every single cent you spend before you’re charged any interest.

You Can Take Out Loans if You Want to… But Proceed with Caution

Obviously, we can’t predict all the individual circumstances you need to weigh when deciding if going into debt is the right decision.

Sure, spending a large, personal loan on an epic vacation seems totally unjustifiable. But what if it’s an aging family member’s dying wish?

And on the other side of the spectrum, a small business loan for an intricately planned venture might look like the picture of “good” debt… but sometimes, even great ideas fall through.

Like everything in life, all debt comes with risk. It’s up to you to weigh that risk against the potential benefits.

I guess that’s how this whole “financial responsibility” thing works, huh?

Jamie Cattanach (@jamiecattanach) has written for Ms. Magazine, SELF, Roads & Kingdoms, VinePair, The Write Life, Wonderfilled Magazine, Barclaycard’s Travel Blog and other outlets. Her writing focuses on food, wine, travel and frugality.

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