What Are Some Forms Of Healthy Debt?
‘Debt’ is a word that often has negative connotations. There are certainly many cases where debt can be unnecessary and destructive. However, not all debt is bad. In fact, there are some cases where debt can be healthy and even necessary.
This post explores some of the good times to take on debt. Using debt solely for these purposes could help you to develop a healthier relationship with borrowing that could even be beneficial to your finances.
Debt as an investment
Debt can sometimes be a necessary way of paying for things that can have financial and personal benefits in the long run. A few prime examples include:
- Buying a house: The average US home costs $420,000 – an amount of money that almost no-one has lying around. Getting on the property ladder often requires taking out a loan. This is a good form of debt because you can build equity over the years. Your home may even increase in value, so that if you ever sell it, you could make a huge return. Alternatively, you can eventually pay off your mortgage – which is better than paying rent forever.
- Starting a business: On average, it costs $30,000 to $40,000 to start a business in the US. Starting your own business could be a great way to make an income on your own terms. Taking out a business loan could allow you to fund your startup dreams. You’ll eventually pay off the loan and every paycheck will be a return on investment.
- Going to college: In-state public university tuition fees cost each student an average of $9,750, while out-of-state students pay $27,450 on average. Student loans are often key to be able to afford these college fees. Education is an investment because it provides us with knowledge and qualifications to pursue higher-paid jobs.
All in all, if you can make more money in the long run by taking on a debt, it is usually worthwhile. However, you need to be certain that it is a good investment and not a gamble. This means buying a house that doesn’t need lots of repairs, starting a business that you’ve carefully planned and researched, and choosing a college course that you are passionate about.
Debt as a way of building credit
Our credit score gives us spending power to sign up to services, buy products and take out new loans. One of the best ways to build credit is to take on debts and consistently pay monthly installments on time.
Regular loans and credit cards can help us to build credit over time – providing that we keep up with repayments. There is also the option of credit builder loans and credit builder cards, which are designed to build your credit score faster. If you have a low credit score or no credit score (if you’re young and have never taken on debts before), credit-builder loans and credit-builder cards can be a healthy form of borrowing.
Just remember that if you miss a payment, you’ll do harm to your credit score. Therefore, any debt is only worth taking on if you can afford to pay it each month.
Interest-free debt that you can afford
A reason why debt is best avoided in many cases is because you typically pay more in the long run as a result of interest fees. The worst types of debts are often low-credit loans and payday loans, because you can end up paying double the amount back in interest fees.
Interest-free payment plans are a healthy form of debt, because you’re not paying anything extra. These include interest free credit cards, interest free loans and ‘buy now pay later’ schemes. They are a healthy alternative to loans with interest when paying for things like furniture, gifts, vacations, repairs and medical expenses – providing that you can afford them.
Interest-free debt that you cannot afford to pay back is not a healthy form of debt, and will usually just lead to further credit score harm and extra fees. Therefore you need to be realistic about what you can accommodate into your monthly budget. ‘Buy now pay later’ installment plans are generally best reserved for relatively small purchases or emergency costs.
Conclusion
Debt can be healthy providing that it is either a form of investment, a way of building credit or an affordable interest-free solution. Just make sure that you are confident about your ability to pay back these debts – otherwise you are likely to undo any potential benefits that these debts may have.
