The difference between good debt and bad debt comes at two levels. One is the terms of the loan: the interest rate, the repayment term and so on. The bigger issue is what you borrowed the money for.
If you borrowed to buy a fancier car, that’s bad debt. If you took out a loan to buy a real estate property that will generate more income and build your net worth over time, that’s a home run. Make sure the debt you take on is used for something productive.
Key points
- Loan terms, such as rate and repayment, matter.
- What you borrow for matters more.
- Borrowing for depreciating stuff is bad debt.
- Borrowing for income-producing assets can build net worth.
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