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I Don’t Believe in “Good Debt”

If you’ve been reading since I started in February 2010, then sorry for repeating myself a little.  I get asked pretty regularly via email about my take on debt and credit cards.  Today, I’ll tackle the debt one, lol.

My View of Debt

I simply don’t think of any debt as good debt.  This doesn’t mean that I treat all debt the same, but I don’t see any of it as a good thing.  For example, the big debts seem to be student loans, credit cards, mortgages, personal loans, and car loans right?  Generally credit cards are called “bad debt”, student loans and mortgages are referred to as “good debt”, and car loans seem to depend on the person talking.

Sorry, but I think that they all suck…credit card debt just sucks the most because it usually has higher interest rates than the others.  That is how I judge debt…it all sucks, and the higher the interest rate, the more it sucks.  :-)

Tackling Our Debt

Does this mean that I flog myself daily for having two mortgages?  No.  But it does mean that I am actively trying to kill both of those loans.  We have the rent house mortgage down to $23,000 and our new home loan is around $206,000.  I hate them both.  And I hate the rent house one more simply since it is at 4.5% while the other one is at 4%.

We are aiming to pay off the rent house mortgage by the end of this year, and then my own personal Eye of Sauron will turn onto our current home loan (yep, there’s some love for Lord of the Rings fans…).  ;-)  Realistically, we may not be able to pay off the big mortgage until sometime between 2022 and 2027, but I will probably try to find even more extra money to send that way since all loans make me feel icky.  I don’t like owing anybody money and I much rather own my stuff outright than know it’s not really mine yet.  That’s the control freak in me.

Won’t I Lose Better Opportunities?

This is usually the point that someone will bring up the lost opportunity cost with the money I use to pay off relatively low-interest debts.

We do invest in other stuff too.  Our Roth IRA’s are invested in several different ways, we have a Scottrade account that is invested in a handful of different high dividend yield stocks, and we have rental income.  Could my debt-paying money make more if we threw that into the mix as well?  Maybe, but a guaranteed 4% return makes me happier than a 0-12% maybe.

Would I take out a 3% interest loan and invest the money in a guaranteed 4% interest return if I could?  Yep.  But I have yet to find 100% guaranteed returns higher than an interest rate of a loan I could take.  In short, yes, there is always an exception, but I haven’t found it in the real world yet.

Do I sometimes see loans as a necessary evil?  Yep.  If you really need a car to get to and from work, and you don’t have the means to buy a car outright, then you will most likely look into a loan option.  I am not judging – we’ve done it twice ourselves.  But my view is that a necessary loan doesn’t make it suck any less.  It doesn’t make it “good debt”.

Please take this post as it is intended – my personal view on the subject of debt.  I totally am not judging anyone else’s views at all.  Speaking of which, do you think there’s good debt?  Did I miss a point?  Feel free to share.  :-)

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30 comments to I Don’t Believe in “Good Debt”

  • It’s so funny that you feel this way, whereas I kind of pick and choose how I feel about “good” debt. I hate my student loan. HATE IT. I have worked my tuchus off to pay that bad boy off as quickly as possible (although I really amped up my effort after it was sold to the bastion of evil that is MOHELA).

    My sister, on the other hand, doesn’t understand the fuss about my student loan. She’s happy to take time to pay hers off because it’s low interest, etc, etc.

    But as for my mortgage, that doesn’t bother me in the slightest. I look at my neighbor, who views mortgage debt the way you do, with the same puzzlement my sister looks at me regarding student debt. My feeling is that I’d be willing to pay money for my lodging no matter what (this is also why I don’t feel that renting is “throwing money away”), so paying my mortgage really doesn’t bother me. That being said, we bought a house well within our budget, put down more than 20%, and have a 15 year mortgage, so it’s not like I’m wanton about my mortgage. I just can’t get the same sense of urgency about paying it off that I do about any other debt.

  • Yeah, I agree on this one. “good” debt, “bad” debt…it’s all debt and it’s all bad! I get why people say some is good versus bad, actaully, they’re all bad…maybe mortgages and student loans are just the lesser of the evils. Mortgages and studnet loans are the Saruman and credit cards are Sauron. Both evil, one just more evil than the other.

    I tend to think we gotta get back to the mindset that peopel had in the old days of saving up before buying. Don’t buy now and pay (more) later, save now and buy later!

  • For me, I think it also depends on the interest rate. We took out a loan for the Jeep last year only because the rate was 0.9% and we know we can beat that in the market.

  • I like this post. I think all debt is bad because frankly it takes money out of our pockets. A mortgage might seem better to regular folks because we all fall in love with our houses and it doesn’t seem that bad to pay the loans. But at the end of the day that is the worst kind of debt because when it’s all said and done you are paying on average 100 grand or more to pay it all off. Imagine how much you could make off that money if you invested it instead. This is my take on the matter. If I could I would pay cash for everything. One thing that makes me happy is paying more than the minimum on all debts to be free sooner than later.

  • I have a similar visceral reaction to avoiding debt at all costs. I love seeing a big, fat, “zero” in the debt column when I run my monthly net worth reports.

    That said, I agree with Michelle that a lot depends on interest rate. 0.9% is a pretty great deal.

  • I am with you! I don’t think that any debt is good debt. Leverage, schmerage. I am throwing everything I can (without adjusting my budget too much) at my mortgage and it is working! I’ve paid off about 11% of my original mortgage (~$286,000) in the last 6 months and I plan to pay the rest off before the ARM resets in 5 years.

    Some people think I’m crazy though since my mortgage is currently sitting at 2.5%. I am still maxing out my tax-advantaged retirement accounts though.

  • retired

    We own our homes, bought all of our cars for cash for the past 15 years. We have had no credit card debt in over 34 years. We did not make six figures ever, raised 3 kids, retired in our 50′s and still have no debt and no problem paying off our bills. And we helped the kids with a small percentage of their college bills and living expenses when needed, so they would have no loan debts.
    Of course I agree with Crystal, lol. Yet, last month we bought this huge van on credit because we could get it for 1.9%. We are making 4% on our investments, but only .5% in our checking accounts and savings accounts, so for once it made loads of sense to take a loan. Being retired, its nice to keep the cushion of cash in the bank, and this way it costs like 1.4%, to keep that cushion. My husband and I worked through college and I had student loans too. Thankfully he helped me pay them off before we got married. Yeah, he was a keeper!
    There is a time when credit is bad, but if you can make more by using it, then it is a very good tool. Just like investing in stocks only if you can afford to lose the money; you shouldn’t use credit unless you can afford to pay it off. We started out in a 2 bedroom foreclosure, so we could afford the debt.
    Sometimes in businesses, credit interest can be taken off as a business expense. You get enough of these tax benefits and it actually pays more to use credit and have expense than to keep the slate clean. Sometimes Sauron is needed for balance, so I do not think of credit as evil or bad. It is a tool, that should only be used when there are known benefits…which is pretty much what Crystal and several others are agreeing with, I am just re-wording it.
    Just a note, when I advocated paying off our home loans the interest rates were 10-12%. Interest in the banks was dropping to 4-5%. CD interest rate plummeted from 14% to 5%. We saved over $100K paying the loans off in 9 years. We used that to buy the cars. Income tax savings on the homes were only good for the first year or two (except on the one we turned into a rental..we were told we had to pay it off before we could get the second house loan, which was bad advice, as you can take off mortgage payment debt on your rental income. Guess we should have taken another mortgage on it, rather than tighten our belts, but we were learning as we went, and we didn’t lose anything but our cushion.). So we banked money (instead of the monthly “rent” payment to the mortgage company, we received a rental check every month) and our actual house investment is pretty much a guaranteed return, as its value has gone up to more than what we paid in principle and interest. As others have said, you need to evaluate your position yourself and act accordingly.
    I think Crystal finds it fun to aim for a goal and accomplish it, as well as to take pride in ownership. Since she doesn’t seem to need the money, paying off the homes is fine, but that may change if she/you need a new car…we have taken loans for things and it hasn’t hurt us either. Car loans for less than 2% just seem too good to pass on if you need a car,and we did, since the replaced car was 13 years old and needed work. And paying off your primary home may actually be better than paying off the rental for income tax reasons, but I wouldn’t know, depends how you treat the rent house. You also have less liability sometimes when there is a mortgage on items you use for business/supplemental income, as banks get protections you don’t and will have first claim on the house with lawyers to back it up. Gives you a little extra protection when doing business and keeps your money totally separate rather easily on paper.
    I too liked the post too, but I like most of your post :)!

  • Love this post and I agree with you. No debt is good. I don’t like owing and I can’t wait to pay off all of our debt. Hopefully by 2017 if all goes well. I’m not against financing a home or car, but I think you need to make sure that a) you can afford the commitment and b) attempt to pay it off much sooner than the loan terms.

  • I agree with you 100% and have said this exact same thing multiple times on my blog. I don’t think it can be said enough that any debt is money you owe, plain and simple. Outside of that there are varying factors that make some worse than others, but unless your debt is somehow putting money in your wallet, it’s not good. The only people I know who can say that is who leverage debt to make income through rental properties (so you’re sort of in that boat) but even then, anybody in that category could be pocketing more money once they pay off the underlying debt.

  • Although I do not have much debt (small mortgage & car loan) and I am paying it off within the next 4 years. I view debt a little differently. I asked the question, “can I earn more money somewhere else?” If so, I will. That was one of the reasons, I chose to take a car loan at 1.99%, I can earn more with the money somewhere else.

  • I think I have a slightly higher risk tolerance than you, so I’m willing to take out a little bit of debt if I’m really confident that I can earn higher returns elsewhere. But when the interest expense starts getting near 5% or more, I start to get antsy because my confidence level of beating that after costs and taxes starts to dwindle a tad.

  • I am in a similar position, trying to get rid of loans I took to invest, even though the returns I get are higher than the loan interest, I just don’t like having the debt around. Regarding the mortgage, my rental property is cash flow positive so I don’t put many efforts into early repayment, I’d rather keep the cash to invest some more.

  • I think that you do think that some debt is good, or at least less bad than others. As you say, you have two mortgages, so if you were so averse to taking on more bad debt, you would have sold one before taking on another house. But you thought the upside of a new house was more significant than the downside of debt. I’m pretty sure you made the right decision, but it shows that debt serves a lot of purposes, not just for the needs like a car to get to work.

  • I hate debt and when the cashflow works in my favour I expend a lot of effort in paying down my student loan. At the same time, I’m not completely adverse to taking on new debt depending on the payoff. I’d be willing to take on a mortgage to buy a house, providing that my monthly housing expenses wouldn’t be jumping up significantly. I’m also pretty insistent that I won’t take on a mortgage unless I can afford to put 25% down and I have to very confident that I’d be planning to stay into the house for at least a decade to be willing to make that decision.

  • I don’t like any debt. I think some debts are not as bad as others, but they are still bad.

  • I don’t hate my debt I am AFRAID of my debt. It is like a stalker from a horror movie. You can’t see it or hear it but you know it is always out there.

    Debt = fear.

  • Agreed! I hate debt and would never have credit card debt as long as I own something to sell first. My student loans are long long gone but still remember doing an extreme dance of joy when I made my last payment. I also remember the first car I “bought” and had to finance it…I literally put my head down on the saleman’s table as I felt sick.

  • I was just arguing with my teacher about whether or not student loans were good debt or bad debt. She argued that she would have lost many opportunities if she didn’t go to the more expensive university, instead of the instate one which gave her a full ride. I argued that debt is debt no matter what and there is no such thing as good debt. In the end, while going to college is a better option for most people, debt is debt, even when it helps in the long run.

  • I don’t want any debt, but would use it if it made money for me as in buying a rental property if I didn’t have cash for the purchase. That being said, I am in debt payoff mode right now and want a zero balance before buying anything else, home mortgage included.

  • Debt gets a bad name; the concept of “good debt” vs. “bad debt” is driven by whether the underlying reason for the debt builds wealth or diminishes wealth. Mortgages build home equity so it is classified as good debt, Student Loans pay for higher education which in turn should create opportunities to have higher earning potential, so it is also considered bad debt. Consumer debt is considered bad as it is financing assets without growth potential that are unattainable otherwise, for example credit cards and car loans.

    The problem is all of the above situations are just general rules and can be completely wrong in a great many situations, for example when you are upside down on a mortgage it is not good debt, you are not building equity, you are losing liquidity to make the lender whole. A $40k a year student loan for a private undergraduate college degree in philosophy is not good debt, the expected earnings will never cover the cost. However buying a car with .9% interest for 60 months and instead of paying cash for the car buy a bank CD earning 2.5% for 60 months is awesome because now your depreciating asset is earning you 1.6% a year.

    Credit card arbitrage, when you borrow from a credit card for 12 months for 0% and then put it in your money market account earning 1% is good consumer debt, in fact the term arbitrage is actually not the best way to describe this, it is in fact called being a bank, you see banks borrow money cheap, the current Fed Window sells cash to banks at .25%, then they lend the money they bowered to customers in the form of mortgages and car loans and credit cards at rates anywhere from 1% to 25%, the difference is what they refer to as profit.

    Banks love debt, you should too. Debt gets a bad name because most people use debt poorly to finance a lifestyle they can’t afford and then try to rationalize whether it is good debt or bad debt so they can feel better about, in reality what defines whether debt is a good thing or not depends on what you use the money for, if it makes you more money than it is a great thing, if it costs you money not so much.

  • Great answer Jay. The words “the debt builds wealth or diminishes wealth” sums it up perfectly and I will think of debt this way.

    I will NOT be borrowing money to invest however. That is risky debt and risky debt is bad debt.

  • So many comments on one post! I should have not scheduled this for a Friday before a really busy weekend, lol. I’ll reply to everyone individually, but I am about to head out again, so it may be later tonight or tomorrow. Glad to have gotten a ton of feedback though – I know that you like talking about debt now. ;-)

  • @Emily, I get that. In the big scheme of things, if mortgages that I can afford are my biggest annoyance, life is good. ;-)

    @TB, yeah. I actually think we may have been better off waiting to buy our new house, but we wouldn’t have been able to get our lot and floor plan. It’s always a balance of want vs need vs risk analysis, lol.

    @Michelle, that’s a great rate, congrats!

    @Rich Uncle El, we like to overpay too. :-)

    @Mike, I completely agree – can’t wait for our big fat 0 of debt and 0.9% is awesome.

    @Leigh, go, go, go!

    @retired, yep, car loans seem to be a pretty great deal right now. I will keep my fingers crossed that they are still that low when we get our next car…but I doubt it…

    @Angella, good way to put it!

    @Money Beagle, good to know I’m not the only hater. ;-)

    @krantcents, true but I can’t wait to owe nothing to anyone…

    @Mrs. Pop, you actually make me feel better about our huge 4% mortgage, lol. We are indeed clearing more than that with our Roth IRA’s.

    @Pauline, there is always that cost vs benefit analysis. :-)

    @Daniel, like I said, some debt is just not as bad as others. We knew we could wait and just pass on this floorplan and specific lot. We just wanted it a lot and decided to take on the debt. It was a eyes-wide-open decision but a mortgage still sucks. :-)

    @Sheryl, careful with that decade decision, lol. We thought we were going to be in our last house for 10-15 years and it ended up being 5, lol.

    @Grayson, yep, right there with you.

    @Jane Savers, you should guest post. I want the story behind those sentences…

    @Leslie, hope you’re feeling better, hehehe.

    @Cassi, exactly.

    @Kim, everyone has to weigh their current circumstances. Sounds like you know what you want right now. Good luck!

    @Jay, I understand what you’re saying. That’s why I don’t flog myself for the mortgages. And I make rental income. But I would profit more if I wasn’t paying off 4-4.5% rates and I would like total ownership too. Like I said, to each their own.

  • @Crystal – Don’t get me wrong I am not criticizing you are anyone for that matter for not wanting to have debt, everyone makes their own decisions based on a number of factors, risk and emotion being the most obvious.

    What I am pointing out is that the way people look at debt is incorrect, all mortgages are not good and all car loans are not bad, every specific debt instrument has to be looked at in regards to the specific situation, is it helping you build wealth or diminishing wealth. Even if debt makes sense some people just prefer to be debt free, which is fine as well.

    The problem I have is most people in the personal finance space only view the one side of debt which is generally owning money to a lender for something the borrower can’t afford, that is short sighted, those same people most likely own bonds of some type whether it be Treasuries or a bond Mutual Fund or corporates, when you own those financial instruments you are the lender and the organization issuing the bonds is indebted to you.

    Owing personal debt to live beyond ones means is bad, any other type of debt can go either way but a simple blanket statement debt is bad does a disservice to anyone who is trying to get their personal finances in order.

  • Yeah, I suppose I don’t really think of there being any good debt, either, but more of a continuum. That said, I would consider borrowing for a car in the future (even thought that’s definitely on the worse end) and in other circumstances when it might be more important to keep cash free.

  • I agree. All debts sucks. Of course, education debt could lead to a good paying job but not always. But, paying off all of your debt is insurance for your financial goals. You can’t reach them if you’re buried under debt no matter how ‘good’ it is.

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