What kind of debt can be considered ‘good debt’?
There is a lot said in the world of personal finance blogging on the subject of debt, as you would expect given that the borrowing of money and the expansion of available credit has pretty much transformed the buying habits of the past two or three generations. Some personal finance bloggers will say that ‘all debt is bad’ and that you should never borrow money at all. Others will say that there is a difference between ‘good debt’ and ‘bad debt’, and that there is nothing wrong with borrowing money as long as it is for reasons that fall into the ‘good debt’ category. Personally I would place myself firmly in the second camp. I don’t feel that all debt is bad but I do think that all debt is a risk and that the borrowing of money should not be taken lightly.
With this in mind then, what types of debt could be considered ‘good debt’? Here are 2 investments that could fall into the category of ‘good debt’ were you to need to borrow the money to fund them.
Buying a House
When thinking about the forms of debt that might fall into the ‘good debt’ category, most people will immediately think of mortgage debt. Unless you happen to have some very rich parents or a celebrity relative who is kind enough to buy a house for you, then it is going to be very difficult indeed for you to be able to afford to buy your first property without the aid of a mortgage. Even people who have a good salary or who run a successful business often still end up using a mortgage to fund a property purchase as lifestyle expectations tend to increase in line with earnings.
Many people are happy to place getting a mortgage and buying a property into the ‘good debt’ category because property has historically proven to be a solid long term investment. Rather than paying rent to a landlord and seeing nothing back for that cash, you are instead investing your money into the purchase of an asset, your own home. Not only will you have an asset of substantial value to show for your money at the end of your mortgage term but you will hopefully also be able to live out your retirement years rent free, only having to pay out to maintain your property, something that you may be very grateful for if benefits continue to get hit by austerity cuts over the medium to long term.
Starting or buying a business
Borrowing money to start or to buy a business is another thing that many people would consider to be ‘good debt’.
Whilst it’s true that it is possible to start a business with very little investment and then build it up slowly, often times a good amount of start-up capital will be needed or you might prefer to buy an existing business that will give you an instant income and customer base which might otherwise take years to build. I also personally know people who have borrowed money to fund the purchase of franchises in the past and they have never looked back, though it should be said that it doesn’t work out for everyone. If you run the business well however and are able to grow it, then the business will hopefully hold its value or even increase, meaning that your initial investment will be returned were you to sell the business at a later date, perhaps with a good lump sum on top of your initial investment to show for all of your hard work.
There is a lot to be said on the subject of borrowing money to buy or start a business but I myself would place this into the ‘good debt’ category as long as you have a solid business plan and have thought about all of the possible implications. Many mainstream lenders such as Santander do allow personal loans to be used for the purpose of a business start-up but some lenders may exclude business use in their terms and conditions, so it is worth checking this out before applying as you will not want to be applying to too many different lenders and possibly dragging down your credit score as a result.
So here we have mentioned just two reasons to borrow money that may be considered by some to be ‘good debt’. As I said earlier in this post though all debt does carry an element of risk along with it whatever you are using it for, so you should be certain that you are well informed of these risks and that you are happy with them before borrowing money for any reason.
Do you think that there is such a thing as ‘good debt’?