The Only Debt You Should Have

Shakespeare wrote “neither a borrower nor a lender be.”

While in general I agree with this advice, I can think of a couple of situations where borrowing can be considered good, perhaps even necessary, for most of us:

Types of Good Debt

  1. Borrowing to acquire an appreciating asset.  For example, a home loan.  You borrow in today’s dollars to acquire an asset that will increase in value over time. My definition of “appreciating asset” does not include investing in securities markets because there is a great deal of uncertainty about the “appreciating” component of the asset.
  2. Borrowing to facilitate or enhance your ability to earn more money.  Examples include:
    • Education loans
    • Borrowing to start or expand a business, or to acquire tools and equipment
    • A car loan, if a car would allow you to widen your job search to include more lucrative opportunities

Types of Bad Debt

Bad debt is any kind of debt that is not good debt, as described above.  There are many examples of debt that is bad:

  1. Credit card debt (if you pay off your credit cards every month you don’t really have debt)
  2. Pay day loans
  3. Borrowing from friends and family (the Shakespeare quote continues: “For loan oft loses both itself and friend”).
  4. Borrowing to finance lifestyle choices that are not otherwise affordable
  5. “Hard Money” loans
  6. Borrowing to speculate or gamble
  7. Investing on margin (investing borrowed money) unless you REALLY know what you’re doing and mitigate your risk
  8. Store financing
  9. Vacation loans

Good Debt Can Go Bad

Even good debt can be a problem if you’re not careful.  As with any debt, be sure you can afford the payments, and that the interest rate is affordable and doesn’t fluctuate and you are paying down the loan with each payment.  Be relatively sure (as sure as you can be in an imperfect world) that your appreciating asset will actually appreciate, or that your education or business investment will increase your earnings enough to justify the borrowing.

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