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In this episode of Old National’s Real Life Finance, we are going to discuss good debt vs bad debt.

First, let me note that not all debt is bad.

Good debt is the kind we use to buy assets that we think will go up in value, or appreciate.

Bad debt are loans we use to purchase items that go down in value, or depreciate. 

First, let’s look at items we consider good debt.

Good debt

Business loans

For business owners that look to expand and grow their businesses, taking on a business loan may be beneficial.

Education loans 

Student loans can be a good debt, depending on how well you plan. Since individuals with degrees tend to make more over a lifetime than those without, this investment can be considered a good debt. 

Student loans are bad debt if you drop out before finishing or if you choose an expensive school to study a profession that really doesn’t pay that well. We encourage you to minimize student loan debt to avoid the stress associated with paying it back. 

Home loans 

This may be considered good or bad debt. Purchasing a home may be a good debt because, in many locations, the value increases over time. In other locations, home prices decline, and this bad debt causes financial stress.

Bad debt

Credit cards

Credit cards can carry high interest rates and finance charges. Many places offer credit cards, but regardless of who issues a credit card, typically it is considered bad debt.

A credit card CAN be good debt if you pay the money you borrow back in full each month. This will help increase your credit score, and you incur NO interest charges. 

Payday loans

Payday loans are usually a short-term, high-cost loan, generally for $500 or less, that is typically due on your next payday. 

According to the PEW Charitable Trusts, twelve million Americans take out payday loans each year, spending $9 billion in fees!  Although payday loans are advertised as being helpful for unexpected or emergency expenses, 7 out of 10 borrowers use them for regular recurring expenses such as rent and utilities.

Car loans

Since a car declines in value and offers no income, car loans are classified as bad debt. However, in today’s age you often need a car to earn income, so the loan COULD be a good debt. 

To qualify, you will want to:

  • purchase used cars (new cars lose up to 30% of their value immediately);
  • shop for a good deal
  • minimize unneeded extras; and
  • shop for the best car loan.

Thank you for watching today, to continue your financial education look for additional Real Life Finance videos from Old National.

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Ben is responsible for enhancing Old National financial literacy initiatives by partnering with schools, colleges, universities, businesses, nonprofits and government agencies. In 2017, Ben was recognized by the National Financial Educators Council (NFEC) with its coveted Financial Education Instructor of the Year Award.

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