Is there such a thing as good debt? The answer is yes. But how you define debt and turn it into good debt is the difference between being an investor and being a dreamer who hopes to become wealthy.
All debt can be turned into good debt simply through using the debt to buy an income producing assets that generates sufficient income to cover the debt payments and provide a little extra for you.
So, how does that work?
In business most people would expect to borrow to start a traditional business, for expanding an existing business or have an overdraft for day to day running operations. It is rare not to see a business which doesn’t have some type of loan or overdraft. In fact, it is often encouraged as a tax deduction and as a way of preserving capital. There is an expectation that the business will generate enough profit from the trading activities to make the monthly repayments on the debt. This is then seen as good debt.
With property, very few people have the luxury of buying a property outright with cash. They would obtain a mortgage for a set period of time. They live in the property paying the mortgage each month and at the end of the period they own the property outright. As strange as it might seem, that is bad debt. It is debt that doesn’t generate an income but relies on income from other sources to make the payments. However, if a property was purchased for business reasons such as rental or commercial uses and the income generated from the purchase is sufficient to pay the mortgage payment then this is good debt.
What are the different types of debts?
Mortgages – the number one way of buying a property. There are banks and lending institutions who specialise in mortgages. Basically, they provide money for the purchase of property. They put a charge on the property which is removed once the mortgage has been paid.
Bank Loans – can be a personal loan or a business loan. They are secured or unsecured. Secured usually being a charge on a property. Bank loans are for shorter duration of time around 5 years this can sometimes be longer up to 10 years.
Overdrafts – are flexible lending facilities which are expected to go fluctuate between credit and debit each month.
Credit Cards – are an alternative source of credit. They provide quick short-term lending.
Crowdfunding – can be used to raise funds for special one off projects providing instant access to funding
Peer-2-Peer Lending – group funding provided as an unsecured loan for small sums of money. Duration of loans usually around 1-5 years.
Used and managed properly debt can be good if it is used to acquire income producing assets.