Is There Such a Thing as Good Debt?

A man and a woman sitting on opposite ends of a couch, each holding financial papers.

"Deep in debt." "Saddled with debt." Negative phrases like these may be the first to come to mind when you think about debt. But with smart money management and sound decisions, debt can be a good thing. Good debt is debt that's used to pay for something that has long-term value and increases your net worth (such as a home) or helps you generate income (such as a smart investment).

How Can Debt Be Good?

Not all debt is good debt, of course. Going into debt for spending that has no lasting value, like an expensive vacation, a fancy dinner out or a 65-inch TV, is a bad idea. But you may need good debt to achieve certain life goals. For example, few of us could buy a house without a mortgage or afford a six-figure college education without student loans.

There's risk in every investment, to be sure. Just as the price of stock you buy may tank, your home might depreciate in value. But in general, good debt can reasonably be expected to deliver a positive return on investment.

What Are Examples of Good Debt?

Good debts can include:

  • Home mortgages: In the short term, home values may rise and fall, but over the long term, homes have historically proven to be good investments. The median price of a home in the U.S. was $79,100 in 1990 (not adjusted for inflation); nearly 30 years later, the median price has more than doubled to $193,500, according to Census data. For many Americans, their home accounts for the bulk of their net worth—and a mortgage can help you build that nest egg.
  • Business loans: Getting a loan to start or expand a business can be a wise investment. Whether or not your business becomes the next Facebook, growing your business can help you grow your income. With careful planning, you can help to make sure that borrowing for your business is a calculated risk.
  • Student loans: Earning a college degree doesn't guarantee you'll get a job, but there's plenty of research showing that it can boost your earning power over time. Median earnings of bachelor's degree holders with full-time jobs are $24,600 higher than the median earnings of high school graduates with full-time jobs, according to 2017 research by the College Board.

Are car loans good debt or bad debt? The answer lies somewhere in the middle. Cars depreciate in value the minute you drive them off the dealer's lot, so they shouldn't be viewed as a long-term investment. But if you don't have cash on hand to pay for a new car outright, an auto loan offers a way to get the transportation you need.

Car loans also share a common characteristic of good debt: low interest rates. Current interest rates on new car loans for those in the top credit score ranges are at or below 5%, according to Experian data. Interest rates for fixed-rate 30-year mortgages average 4.4%, according to Experian data from the first quarter of 2019. In contrast, the Federal Reserve says the average annual percentage rate (APR) for credit cards has hovered between 14% and 15% since early 2018.

Is It Better to Have No Debt?

Your grandparents may have hidden their money under the mattress and scoffed at the idea of owing anyone money. But in the 21st century, trying to live completely debt-free is difficult. What's more, it can actually cause financial problems down the road.

Unless you take on good debt, you may not be able to buy a home or get a college education—all investments that can enhance your income or net worth.

Managing debt responsibly also helps you build a good credit history. Since your credit scores can be a factor in everything from renting an apartment to getting a job, a good credit score can open lots of doors.

It's better to have no debt than to have bad debt—but having good debt and managing it wisely can be a smart financial move.

Good or Bad: It's up to You

Even good debt can go bad if you take on more than you can afford. If your mortgage eats up half your salary, or you've taken out $200,000 in student loans to get a degree in 19th century Romanian poetry, that's not so good. To make good debt work for you, be sure to match your debt to your goals, keep your debt-to-income ratio under control, and never take on more debt than you can afford.