Debt is a tool. It’s not an evil anthropomorphic shadow that hovers over us, forcing us to make bad decisions. When used properly, debt can improve our lives and help us achieve great things. You may not believe that if you’re struggling to be debt-free from high-interest credit card debt, but there are other forms of debt that can be beneficial.
First off, that credit card debt you’re paying is what’s classified as “bad debt.” Many consumers use their cards to rack up hundreds or even thousands of dollars in interest-bearing debt. Some of those purchases could be made in cash. Hindsight is always 20/20. Paying 15% to 30% interest is not “advantageous.” That’s not the type of debt we’re talking about.
Your mortgage and your car payment are “good debt,” if you need the car to get to work. Taking out a personal loan to start a business also falls in this category. The difference between these financial vehicles and credit card debt is that there is an asset attached to them. You borrow money to buy something that will benefit you in some way.
Low interest and 0% APR financing are OK
Buying something on credit isn’t inherently bad. It’s the high-interest rates that get you. If you must use a credit card, try to find one with an interest rate under 10% or look for 0% APR financing that will allow you to buy on credit with no interest payments for a certain amount of time. Several retail stores offer this type of arrangement for big-ticket items like furniture and appliances.
Consider the purchase of a new mattress. We spend a third of our lives in bed, so investing in a good mattress is a move to improve that area of your life. Sleeplessness can cause health problems. A comfortable night’s sleep makes you more productive when you’re awake. It’s OK to buy the mattress on credit, especially if you can get 0% APR financing.
Your mortgage is another good example. Interest rates have been historically low for several years now, and many consumers have taken advantage of that to buy new homes. That’s a smart move if you don’t overpay for the property. Every payment you make on the mortgage helps you build equity in your home. That’s an asset, aka good debt.
The good, the bad, and the ugly of auto loans
An auto loan can be good debt if the vehicle gets you to and from work. Some people even use their vehicle to make extra money on the side, like pizza delivery and rideshare drivers. If your car is more than just a recreational vehicle, it can be classified as good debt. This could also apply to a motorcycle or commercial truck.
The bad side of auto loans is that they can be expensive, especially if you have a less-than-perfect credit score. A borrower with a credit score over 780 can score an APR as low as 2.34%. Anyone under 600 is getting an interest rate of at least 11%. It’s important to weigh cost against value before making the decision to finance a new automobile.
The ugly side of auto loans is those “extras” the salesperson tries to push on you. Extended warranties are pure profit for them. You don’t need one. You also don’t need all those cosmetic extras. Making debt work for you is all about buying only what you need and getting the best interest rate while doing it. Follow that line of thinking and debt will be advantageous.
Kevin is a former fintech coach and financial services professional. When not on the golf course, he can be found traveling with his wife or spending time with their nine wonderful grandchildren and two cats.