In its optimal version, a good debt is one that will allow the one who contracts it to generate higher income than interest charges. It will thus be said that indebtedness serves as a lever for bringing in money.
The purchase of an income property is a case in point. In the context where your interest payments are lower than the profit from the difference between rents and expenses, your mortgage will be considered as good debt. Of course, other factors come into play, including the opportunity costs related to the time you spend managing the property and investing a down payment, as well as the rate of increase in its value. Here, mortgage financing acts as a sort of loan to start a business. Read our article to learn more about what it means to own an income property.
Buy instead of rent. Good debt?
Buying a condo or a house to live in obviously does not provide the same income opportunities, but with sharing economy platforms like Airbnb, it is now possible to reduce the impact of debt by optimizing the use of the property. Since it is practically unthinkable for the majority to pay the entire sum at once for the purchase of a house, we will not speak of good or bad debt, but rather of healthy debt and the constitution of a patrimony. In a way, these amounts to forced savings and capital can also be used as leverage for one day making investments that will yield a higher return than the mortgage rate.
It all depends on our needs and ambitions
Generally, a good debt excludes all expenses contracted with the help of financing which will be used only for the consumption of goods and services. If your budget does not place you in a position to provide emergency funds, purchasing non-essential property on credit is most likely an undesirable debt. However, the concept of good or bad debt can differ depending on the situation and the subjectivity of each and everyone.
Putting a few thousand dollars on a line of credit in order to travel is certainly not a budgetary approach, but a globetrotter will see a very meager price to pay to go there. discovery of new landscapes. On the other hand, his accountant would probably advise him to save for a few months before leaving.
Receiving loans while studying is similar to the previous example, in that the acquisition of knowledge has great intangible value, but it is still easier to see it as a good form of debt since the A university degree or technical training generally contributions to a more profitable career in financial terms.
Finance the purchase of a car
Buying a car using interest rate financing is in the vast majority of cases bad debt. It is a good whose value depreciates quickly and which incurs a lot of costs. Note that for those whose trade or distance from the workplace requires a car, this debt often has a lower opportunity cost than being unemployed. Of course, the car is also essential for family reasons, but in these cases it is desirable to stick to a vehicle that respects our financial capacity.
Interest-free financing and points program
Using credit can be very beneficial in these circumstances, but it requires great discipline. Too many consumers will buy furniture and other finance-like goods without payment or interest for a certain period of time without planning to set aside the money needed to make the payment at expiration. The same is true for credit card rewards programs. If you put everything on your card to get a 1% rebate while paying 19% interest on an unpaid balance, you better curb your spending.
Sometimes the help of a counselor can help you see more clearly. For everything related to mortgage financing and the options available to you
- In its optimal version, a good debt is one that will allow the one who contracts it to generate higher income than interest charges. It will thus be said that indebtedness serves as a lever for bringing in money.
- The purchase of an income property is a prime example. In the context where your interest payments are lower than your profit from the difference between rents and expenses, your mortgage will be considered as good debt.
- Buying a house: in a way, it comes down to forced savings and capital can also be used as leverage for one day making investments that will yield a higher return than the mortgage rate.