While debt commonly carries a negative connotation, the truth is that there are many kinds of good, productive, and beneficial debt when it comes to financial health and prosperity. Many individuals strive to live debt-free but possessing some debt can actually present various advantages. It is important to understand what kinds of debt are beneficial and which are harmful before deciding to accrue more debt.
Positive Aspects of Debt
Used or acquired improperly, debt can be detrimental, but there are plenty of positive aspects of debt in general that can help reframe our perspective. By issuing a loan to a borrower, lenders participate in redistributing money and stimulating the economy. Debt is a means of encouraging continued circulation of funds amongst economic players, and it also reduces the imbalance of money between those with an excess of funds and those with a shortage. Additionally, debt tends to benefit both players; the lender earns money through interest, and the borrower can purchase, invest, or otherwise utilize funds they would otherwise like.
Low-Interest Debt
A common feature of beneficial debt is low interest rates. Student loans and home equity loans are two examples of acquired debt that may feature lower interest rates, making them easier to pay off over time because they do not experience significant growth in the overall amount owed. Credit card usage can be useful to an individual as long as the balances can be paid monthly, thus avoiding interest charges. If left unpaid, many card companies charge a very high rate of interest so cautious use of credit cards is urged. High interest rate and high risk debt, such as payday loans or cash advance loans (some reaching 300 percent annually) are tough to swallow while low-interest debt is more palatable and beneficial in the long run.
Growth in Value
Another common characteristic of good debt is the ability for growth in value or the opportunity for good returns. Student loans are an example of this feature, as a college education tends to make individuals more valuable as employees, thereby increasing their potential earnings in the future. Taking out a small business loan can also result in beneficial debt, as these loans can help business owners achieve greater success and earn higher returns. Some investments that require loans at first, namely those made in real estate, are also great examples of this category; while the upfront cost and the accrued debt may be substantial, investors tend to find that these kinds of debt lead to great returns on their investment.
Securities and Investment Advisory Services offered through Essex Financial Services, Inc., a Registered Investment Advisor, Member FINRA, SIPC. A subsidiary of Essex Savings Bank. The securities and insurance products offered through Essex Financial Services, Inc. are not a deposit of, or other obligation of, or guaranteed by any bank, or an affiliate of any bank, are not insured by the FDIC or any other agency of the United States, the Bank or an affiliate of the bank and involve investment risk, including the possibility of a loss of the principal amount invested.