What are differences between the good and bad debt?

[Agung]

What are differences between the good and bad debt?

[LeslieR]

I have no idea what you are referring to. Can you be more specific with your question? Any debt that you're paying interest on and that doesn't represent an investment may be construed as a negative. But that's all in the mind of the debtor. It could be argued that any debt that you have the means to pay back is fine. Or not.

[jq26]

Good debt is debt that will increase your wealth long term (student loan or home). Bad debt is for consumption (car loans, credit card, installment loans on things you've purchased).

That's basically it in the most basic form. Of course, if you borrow $100k to get a degree in basket weaving, that wasn't good debt even though you now have a degree. And if you borrow to buy a home in a declining neighborhood that may not be good debt either. So you have to be smart.

[LeslieR]

I'm gonna go ahead and give jq points for that answer (except that the system won't let me)...

[Ravenous Wolf]

Something else to keep in mind is that debt management is totally different than credit management and oftentimes the goals of the two conflict with each other.

For example, to lower your debt it might sound like a good idea to pay off a loan early, like a car loan. That is wise debt management if you can do it especially if you need to have more free cash (had a baby, etc).

But it sucks as wise credit management because your credit score is based on a lot of factors like payment history. The longer that you having input to a credit item, then the more positive data that you are accumulating for it, thus improving your credit score. So in other words, you are helping your credit score by paying things off early (unless you are over utilized, etc).

[Robert Nashville/Savannah]

All debt, regardless of what it is used for, entails risk which is something most people either don’t realize or don’t “want” to realize. How much risk a particular debt has varies a great deal but high or low risk, you will never have true wealth if you are paying compound interest instead of earning it.

Financing anything that either doesn’t appreciate or, much worse, depreciates is at a fundamental level, a very bad financial decision and will usually keep you very poor.

Some people can handle debt well (but that doesn’t mean there is no risk)…some people can’t handle debt well and if a person has a history of not handling debt well then obtaining any debt for any reason is something that person should probably avoid even if they’ve re-written their credit history to look like a good credit risk.

Not to throw religion into this but I believe the sentiment to be true nonetheless – in Proverbs it says that “the borrower is slave to the lender”. I don’t like being anyone’s slave; so, I don’t like debt very much.

However, as to what is “good” and what is “bad” debt…I wouldn’t say it’s either but I would say that debt is usually something to be avoided.

[chrismg]

Investing in anything that is negative equity is a bad investment. Some of these investments are necessary evils. A vehicle for instance is a negative equity necessary evil. Whether you take 25k out of your pocket and buy a car, or finance it...next year it will be worth less money.

Debt is different from an investment. All debt is bad...there is nothing positive about debt. The only way to make debt go from bad to worse is with increasing interest rates.

I consider my house a good investment. But, there is nothing good or appealing about my mortgage.

[Robert Nashville/Savannah]

Investing in anything that is negative equity is a bad investment. Some of these investments are necessary evils. A vehicle for instance is a negative equity necessary evil. Whether you take 25k out of your pocket and buy a car, or finance it...next year it will be worth less money.

The only thing that makes financing a vehicle purchase “necessary” is the borrower’s inability to say “no” to the little kid inside of him/her that says “I want it now” and refuses to save money/work slowly to obtain the vehicle they really want.

Frankly, if the OP wants to know what kind of debt it “bad”; it has to be debt on vehicles; financing anything that goes down in value like a rock is just plain bad financially (the worse accidents happen on the showroom floor)!

[bigswanging23]

Stop feeding this troll.

[LeslieR]

I kind of had the same reaction to the OP's post - it had all the red flags.

But the topic makes for interesting conversation.

[chrismg]

Frankly, if the OP wants to know what kind of debt it “bad”; it has to be debt on vehicles;

Are you serious Robert_Nashville? I have always been told that vacations and gambling are the worst investments to go into debt over. A vehicle note doesn't come close imo.

If I was going to say anything close to "good" debt, I'd say your primary residence and medical debt.

[LeslieR]

RN is beyond serious. Have you noticed his "zero FICO goal"?

Although I disagree with it and think it's impractical and unrealistic for most people, I respect his position. But he is very serious in his belief that any debt is the devil.

[AboveAverage]

...But he is very serious in his belief that any debt is the devil.

I have read books on wealth and debt that support Robert's position though. When I did a calculation of my net worth through BOA's my portfolio site, I was pretty much disgusted and tried to do all I could to get rid of my debt I created with my auto loan. I am not by nature a saver but books that I have read on homeownership suggest I'm going to have to be. Can't be that hard since by nature, I never liked paying bills either.

Mind you, he even says that mortgage debt is bad too and that I do disagree with....I really can't see myself saving up for a house and paying cash unless I had a second job, and even then it would take at minimum 10 years. My personal timeline to own a home is within the next 2-4 years (more leaning toward 2) so that I can have it paid off by the time I retire at the age of 60. I may not have a fully paid off home, but when I sell it and go out to pasture somewhere, I'll most certainly have enough from the sale of my house to pay for the next one in cash and live off the land.

But the car thing actually makes sense and if I'm successful in my plan to win my lemon law case, I will buy a decent used car that I can have for 5 years, save my car payment monthly (between 500-700) and in a couple of years get a brand new car paid in cash money....some of things he says is a bit off, but his beef with personal financial responsibility is dead on.

So yeah, have a 800 Fico score and be broke, or have a zero FICO score and be cash-rich? Personally, I want both, but if I had to choose one it would be the latter.

[Robert Nashville/Savannah]

Are you serious Robert_Nashville? I have always been told that vacations and gambling are the worst investments to go into debt over. A vehicle note doesn't come close imo.

If I was going to say anything close to "good" debt, I'd say your primary residence and medical debt.

You refer to vacations, gambling and vehicles as investments and you ask me if I’m serious? All three of those items are consumptions, not investments.

For every person that would spend wild amounts of borrowed money on vacations or gambling, there are 10,000 who spend twenty or thirty or forty thousand dollars on a vehicle every few years who are loosing not only 40-60% of the value of the vehicle in just two or three years but who are also in perpetual car debt (which means they are also giving up far more - most anyone in this country could retire a millionaire if they just saved the amount of the average care payment during the typical working lifetime).

For most people, financing their vehicle purchase (especially new vehicle purchase) is the single worst financial decision they make.

[Robert Nashville/Savannah]

...But he is very serious in his belief that any debt is the devil.

I don’t believe I’ve ever said that debt is “the devil” or “evil”; I’ve said having debt is a bad financial decision, some worse than others.

As I said earlier in the thread debt…all debt…entails risk; risk that most people either don’t or won’t take into consideration.

Debt robs us of the best wealth-building tool we have…our income, because it all goes out in payments…you cannot build wealth as long as you are paying compound interest instead of having it paid to you.

…Mind you, he even says that mortgage debt is bad too and that I do disagree with

I don’t expect most people to save and pay cash for their homes but I do absolutely know if can be done.

I may or may not have used the word “bad” when referring to mortgage debt but the point is not that I want to insert philosophical discussions of “good” or “bad” or “evil” into this…is has to do with risk and the true cost of debt and how it robs us of our ability to actually be wealthy (rather than just looking wealthy).

[chrismg]

You refer to vacations, gambling and vehicles as investments and you ask me if I’m serious? All three of those items are consumptions, not investments.

.

I refer to vacations/gambling as bad investments in terms of getting into debt over...or "bad debt" as the OP called it. A vehicle is certainly better than those since you at least have the vehicle when all is said and done and does have material value.

No matter how you twist it, financing a vehicle isn't the worst debt around.

[LeslieR]

No matter how you twist it, financing a vehicle isn't the worst debt around.

I agree.

[LeslieR]

I don’t believe I’ve ever said that debt is “the devil” or “evil”;

That's why I used the wink.

I agree with your basic principle behind the argument - even that it is possible to save and pay cash for cars and houses. But I disagree that it is realistic for many, if not most, people - and I disagree that these HAVE to be the worst financial decisions. Managed carefully and strategically, they don't have to be.

[Robert Nashville/Savannah]

I refer to vacations/gambling as bad investments in terms of getting into debt over...or "bad debt" as the OP called it. A vehicle is certainly better than those since you at least have the vehicle when all is said and done and does have material value.

No matter how you twist it, financing a vehicle isn't the worst debt around.

Unless you are adicted to gambling or vacations and pile debt on top of debt year after year to support your habit it is - run the numbers yourself; you don't have to take my word for it.

In any case, if you are drowining in debt (most people in this country are hence the need for forums like this) it doesn't really matter what you spent the money on - if you have debt you have payments if you have payments that's money you can't save/invest which means you had better get used to using the phrase "would you like fries with that?" when you hit retirement age.

[Robert Nashville/Savannah]

That's why I used the wink.

I agree with your basic principle behind the argument - even that it is possible to save and pay cash for cars and houses. But I disagree that it is realistic for many, if not most, people - and I disagree that these HAVE to be the worst financial decisions. Managed carefully and strategically, they don't have to be.

Well it seems, then, that you are saying that people spending money they don't have (which is what debt really is) is a more realistic way to live?

I'll agree it's the far more "usual/normal" way people live which I suspect is why are rates of bankruptcy is so astronomical (and our rate of saving so tiny)...why every bump on the road or major life event is not just a bump or event but also a financial disaster as well.

I'm not trying to beat up on anyone here but if that's the realistic way to live then I'd rater be completely unrealistic.

[jq26]

We seem to go rounds here, but saving 100% for a home and then buying it is a stupid decision. For one thing, homes have appreciated over the past twenty years at 4.5%. So if you had the ability to buy a $200,000 home in 1988 but you decided that you were going to try to pay cash, that home would appreciate to $482,300 in 2008 based on historical returns. The point here is by making the purchase early, you have engaged in asset freeze. If you attempt to wait until you pay cash, every year's savings is either matched or dwarfed by the appreciation. So let's say you are the best saver ever and manage to squirrel away $20k per year for 20 years. In 2008, you still have $83,000 more to save. Plus, and this is a huge plus, you still have to pay rent to live somewhere. So now you are "saving" trying to catch the appreciation (not easy to do) plus you have your own rent costs! If you bought early, you certainly have mortgage carrying costs, but they are in lieu of rent and allows you to take advantage of three things: asset freeze, mortgage tax deduction, and appreciation capture at 0% capital gain rate (on primary residence only).

I'm not advocating $0 down early purchase. That's like playing roulette unless you have significant liquid assets elsewhere.

Vehicles are just a money pit. You have "reverse asset freeze" (you lock the price at its highest value then it depreciates from there), you have no interest deductions, and you have carrying costs that are not in leiu of anything (ex: a mortgage is in leiu of rent...a car payment is in leiu of ?).

I edited it to add there are considerations beyond financial ones in play here. Is this hypothetical saver going to wait two decades to buy the home with a backyard? Probably not. By that time, the kids are well into their teens and don't need a backyard. The time has passed. The same "life decisions" come into play with vehicles. You could squeeze the family of five into a Prius and make a sound financial decision or you can make the less wise financial decision and buy the Rav-4. These things aren't always dictated by finance alone.

Just my 2 cents.

[LeslieR]

Very well-put, jq26.

[JustaTexan]

Yes yes very well put and you have some very good points. I tried to give you love but once again, CIC wants to be a-whoring.....

[Robert Nashville/Savannah]

I am not opposed to people having a mortgage so long as it’s done reasonably; so latching onto this one thing to keep discussing is a bit odd.

In any case, there is a lot more to owning your home than just the numbers but the numbers don’t work anyway…there are plenty of good mutual funds out that have always outperformed residential property as an investment, even through the great depression, especially over the long term so claiming that a person is loosing ground by saving up to buy a home rather than buying with a mortgage and paying interest simply doesn’t work mathematically.

The only people saying you have to wait 20 years (or some other ungodly amount of time) are those who what to come up with reasons not to do it.

If your income is appropriate for the COL where you live then is should be more than possible to save up enough in 5 or so years depending on how motivated you really are (or unless you are trying to buy more house than your can truly afford which is often the real reason peoples will say paying cash for a home can’t be done).

I doubt that there is anyone out there right now, whatever your currently annual income is, who hasn’t lived on far, far, less than they make now yet as soon as we get that next raise, we find a way to spend it all (and usually more than all)…if we make $60K we seem to completely loose our memories of how we every managed to live on $35K a year but how long would it really take to save up enough to buy a hose (that can truly be justified on a $60K a year income) if we made $60K a year but lived like we made $35K for a time?

I not only know intellectually that it can be done in less than five years; I’ve personally seen it done in less than five years.

I’ve never said it was easy or not without making a sacrifice but is absolutely can be done and is probably the best financial decision most people could make if they would just do it…can you even imagine how truly rich you could be if you are sitting in a paid-for house and driving a paid-for car and the only “payments” you have in a typical month were your utilities? You would easily retire a multi-millionaire.

Maybe actually being a millionaire just isn’t sufficient motivation for people anymore – they would rather “look” wealthy than “be” wealthy!

[JustaTexan]

Yeahhh umm Robert, I'm going to need you to stop quoting my siggy please. That's like the second time now.