Good Debt, Bad Debt: What’s the Difference?

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No matter whether it’s high-interest credit card debt or so-called good debt such as student loans or mortgages, carrying more debt than you can afford can seriously hamper your life and finances.

According to the Federal Reserve in January 2019, excessive student loan debt has prevented young people from buying homes. The Federal Reserve looked at homeownership rates between 2005 and 2014 and found that rising student debt levels during that period likely caused homeownership rates among 24- to 32-year-olds to drop by 2 percentage points.

Meanwhile, a November 2018 survey from Summer — which is dedicated to helping student loan borrowers — and Student Debt Crisis found that many recent grads are putting off other life goals, too, such as starting a family or business.

Not only can too much debt force you to put parts of your life on hold, it can wreck your credit score. If your balances grow so high that you can’t afford to pay even the minimum amount due, you could begin collecting delinquencies (late payments by 30 days or more) on your credit reports. That is a major red flag to lenders.

But not all debt is necessarily worth avoiding. As long as you limit what you borrow and routinely pay your bills on time, a reasonably priced loan can often help you get things you couldn’t afford otherwise, such as a higher education, a reliable car, a quality computer or a home you can call your own.

What makes debt good or bad?

According to credit expert Beverly Harzog, determining whether a loan is good or bad largely comes down to how affordable it is and how you use it.

“A lot of people don’t understand that not all debt is bad,” Harzog said. Some loans can help you build credit so that you can afford lower-priced loans in the future. Others help you invest in assets — or in yourself — so that you can start to build wealth at a younger age.

If you’re considering taking out a loan and know that you can’t pay it off immediately, you may want to first ask yourself:

  • Is this loan helping me reach an important goal?
  • Am I paying a fair and affordable interest rate?
  • Can I pay off this loan within a reasonable time period?
  • Will I have to make major trade-offs in my life to repay this loan? (And am I OK with that?)

4 types of good debt

It’s not always possible to go through life without ever paying interest. There are times when debt is worth the extra cost.

These are some of the types of loans that many experts consider to be good debt:

  • Loans that help you reach a personal goal. If you’re trying to improve yourself and your life circumstances but don’t have the cash to finance your venture upfront, a loan can help — as long as you borrow within reason. For example, financing your education would be considered a worthwhile reason to borrow, said Bruce McClary, vice president of communications at the National Foundation for Credit Counseling. “There are certain types of debt that are more like investments in your future, like a student loan that helps you obtain a degree and that allows you to increase your future earning potential,” he said.
  • Loans that help you build wealth. Some loans can help you earn more money over time by allowing you to purchase an asset upfront and reap the benefits later if that purchase grows in value. A home loan would be considered an investment, McClary said. “You are making payments toward ownership of property,” he said. “As you own that property, the hope is that it will increase in value and build equity.”
  • Loans that help you purchase an essential need. A loan can help you finance purchases that you need but can’t afford to pay in cash, such as a reliable car you can drive to work or a new furnace or refrigerator.
  • Loans that help you save money. Some loans can help you shave your overall costs, Harzog said. If you have good credit and use a low-rate personal loan to pay off your debt, that loan would be considered a net positive, she said. Similarly, a credit-builder loan can help you improve your credit score and save money on interest.

4 types of bad debt

Debt becomes harmful when it starts to hold you back in life rather than help you move forward. For example:

  • Loans that cost you a substantial amount of interest. If you have a large balance and are being charged a double-digit APR, that would be considered bad debt that you want to pay off quickly. For example, payday loans charge notoriously high APRs. “Carrying a balance and paying interest, this is just toxic debt,” Harzog said. “Your balance can just grow so quickly.”
  • Loans that prevent you from achieving your goals. If your debt is holding you back in life — by making it difficult to save for retirement, buy a home or invest in yourself in other ways — that debt would also be considered bad debt. That’s why some debt that’s traditionally considered good debt, such as student debt or a large mortgage, can turn toxic if you borrow too much of it.
  • Loans that can be difficult to pay off. Some loans are so expensive that they are notoriously hard to get rid of once you’ve taken them out. Payday loans, for example, often come with APRs near 400%. “This can drag people into a terrible debt cycle,” Harzog said. Some people, for example, wind up taking out additional payday loans just to cover the expenses they incurred with their last one, she noted. “It can get out of control in a hurry,” she said.
  • Debt that costs you money with little in return. Spending money on interest when you don’t have to can be harmful. If you revolve a balance on your credit card when you can comfortably afford to pay off your balance in full, you are throwing money away for no good reason.

What to do when you have bad debt

If you have a lot of toxic debt, you should work to pay it off as soon as possible:

  • Continue to pay at least the minimum amount due on every loan since you’ll have more options if you have good credit. Then, map out a plan to shrink your debt.
  • A balance transfer card with a lengthy 0% promotional period or a personal loan with a lower interest rate can help you consolidate your debt and pay it off more quickly.
  • You may be able to lower your interest payments or work out a sustainable repayment plan by contacting your lender. “Negotiate with your creditors,” McClary said. “If you feel that your progress toward paying off debt is stymied by paying a higher interest rate than you deserve, it’s on you to make the first move.”

Finally, don’t forget to think back on how you accumulated so much debt in the first place, Harzog said. “Sometimes it’s an emotional issue,” she said. If you’re overspending because you feel anxious or you get a feel-good boost each time you charge your card, it’s important to work through those issues before you return to borrowing. That way, “once you’re out of debt, you can stay debt-free,” Harzog said.

Interested in a personal loan?

Here are the top personal loan lenders of 2019!
LenderAPR RangeLoan Amount 
1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Fixed rates from 5.990% APR to 16.990% APR (with AutoPay). Variable rates from 5.74% APR to 14.70% APR (with AutoPay). SoFi rate ranges are current as of March 18, 2019 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. See APR examples and terms. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 5.72% APR assumes current 1-month LIBOR rate of 2.49% plus 4.28% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.
  2. To check the rates and terms you qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull.
    See Consumer Licenses.
  3. Minimum Credit Score: Not all applicants who meet SoFi’s minimum credit score requirements are approved for a personal loan. In addition to meeting SoFi’s minimum eligibility criteria, applicants must also meet other credit and underwriting requirements to qualify.
  4. SoFi Personal Loans are not available to residents of MS. Maximum interest rate on loans for residents of AK and WY is 9.99% APR, for residents of IL with loans over $40,000 is 8.99% APR, for residents of TX is 9.99% APR on terms greater than 5 years, for residents of CO, CT, HI, VA, SC is 11.99% APR, and for residents of ME is 12.24% APR. Personal loans not available to residents of MI who already have a student loan with SoFi. Personal Loans minimum loan amount is $5,000. Residents of AZ, MA, and NH have a minimum loan amount of $10,001. Residents of KY have a minimum loan amount of $15,001. Residents of PA have a minimum loan amount of $25,001. Variable rates not available to residents of AK, TX, VA, WY, or for residents of IL for loans greater than $40,000.
  5. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)

2 Includes AutoPay discount. Important Disclosures for Payoff.

Payoff Disclosures

  1. All loans are subject to credit review and approval. Your actual rate depends upon credit score, loan amount, loan term, credit usage and history. Currently loans are not offered in: MA, MS, NE, NV, OH, and WV.

3 Important Disclosures for FreedomPlus.

FreedomPlus Disclosures

  1. All loans available through FreedomPlus.com are made by Cross River Bank, a New Jersey State Chartered Commercial Bank, Member FDIC, Equal Housing Lender. All loan and rate terms are subject to eligibility restrictions, application review, credit score, loan amount, loan term, lender approval, and credit usage and history. Eligibility for a loan is not guaranteed. Loans are not available to residents of all states – please call a FreedomPlus representative for further details. The following limitations, in addition to others, shall apply: FreedomPlus does not arrange loans in: (i) Arizona under $10,500; (ii) Massachusetts under $6,500, (iii) Ohio under $5,500, and (iv) Georgia under $3,500. Repayment periods range from 24 to 60 months. The range of APRs on loans made available through FreedomPlus is 5.99% to a maximum of 29.99%. APR. The APR calculation includes all applicable fees, including the loan origination fee. For Example, a four year $20,000 loan with an interest rate of 15.49% and corresponding APR of 18.34% would have an estimated monthly payment of $561.60 and a total cost payable of $7,948.13. To qualify for a 5.99% APR loan, a borrower will need excellent credit on a loan for an amount less than $12,000.00, and with a term equal to 24 months. Adding a co-borrower with sufficient income; using at least eighty-five percent (85%) of the loan proceeds to directly pay off qualifying existing debt; or showing proof of sufficient retirement savings, could help you also qualify for the lowest rate available.

4 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Personal Loan Rate DisclosureFixed interest rates from 6.79% – 20.89% (6.79% – 20.89% APR) based on applicable terms. Lowest rates range from 5.99%-18.99% (5.99%-18.99% APR), are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment Discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  2. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with us at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  3. Automatic Payment Discount: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their Citizens Bank Personal Loan during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account two or more times within any 12-month period, the borrower will no longer be eligible for this discount.

5 Important Disclosures for LendingPoint.

LendingPoint Disclosures

  • Loan approval is not guaranteed. Actual loan offers and loan amounts, terms and annual percentage rates (“APR”) may vary based upon LendingPoint’s proprietary scoring and underwriting system’s review of your credit, financial condition, other factors, and supporting documents or information you provide. Origination or other fees from 0% to 6% may apply depending upon your state of residence. Upon LendingPoint’s final underwriting approval to fund a loan, said funds are often sent via ACH the next non-holiday business day. LendingPoint makes loan offers from $2,000 to $25,000, at rates ranging from a low of 9.99% APR to a high of 35.99% APR, with terms from 24 to 48 months. The loan offer(s) shown reflect a 28 day payment cycle which is being offered as a courtesy as many of our customers are paid on a biweekly schedule and thus this may better align the loan payment dates with your actual income receipt schedule.

6 Important Disclosures for LendingClub.

LendingClub Disclosures

All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.95% to 35.89%*. The origination fee ranges from 1% to 6% of the original principal balance and is deducted from your loan proceeds. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at the time of application. The average origination fee is 5.49% as of Q1 2017. In Georgia, the minimum loan amount is $3,025. In Massachusetts, the minimum loan amount is $6,025 if your APR is greater than 12%. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months. Borrower must be a U.S. citizen, permanent resident or be in the United States on a valid long term visa and at least 18 years old. Valid bank account and Social Security number are required. Equal Housing Lender. All loans are subject to credit approval. LendingClub’s physical address is: LendingClub, 71 Stevenson Street, Suite 1000, San Francisco, CA 94105.

†Per reviews collected and authenticated by Bazaarvoice in compliance with the Bazaarvoice Authentication Requirements, supported by anti-fraud technology and human analysis. All reviews can be reviewed at reviews.lendingclub.com

**Based on approximately 60% of borrowers who received offers through LendingClub’s marketing partners between January 1, 2018 to July 20,2018. The time it will take to fund your loan may vary.


7 Important Disclosures for Earnest.

Earnest Disclosures

  1. Earnest does not lend in Alabama, Delaware, Kentucky, Nevada, or Rhode Island.

8 Important Disclosures for Avant.

Avant Disclosures

* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.

** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33


* Important Disclosures for Upgrade Bank.

Upgrade Bank Disclosures

* Your loan terms are not guaranteed and are subject to our verification and review process. You may be asked to provide additional documents to enable us to verify your income and your identity. This rate includes an Autopay APR reduction of 0.5%. By enrolling in Autopay your payments will be automatically deducted from you bank account. Selecting Autopay is optional. Annual Percentage Rate is inclusive of a loan origination fee, which is deducted from the loan proceeds. Late payments or subsequent charges and fees may increase the cost of your fixed rate loan. All loans made by WebBank, member FDIC. Please refer to Upgrade’s Terms of Use and Borrower Agreement for all terms, conditions and requirements.

** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.

5.74% – 16.99%1$5,000 - $100,000

Visit SoFi

7.54% – 35.99%$1,000 - $50,000

Visit Upstart

7.99% – 35.89%*$1,000 - $50,000

Visit Upgrade

5.99% – 24.99%2$5,000 - $35,000

Visit Payoff

5.99% – 29.99%3$7,500 - $40,000

Visit FreedomPlus

6.79% – 20.89%4$5,000 - $50,000

Visit Citizens

9.99% – 35.99%5$2,000 - $25,000

Visit LendingPoint

6.95% – 35.89%6$1,000 - $40,000

Visit LendingClub

6.99% – 18.24%7$5,000 - $75,000

Visit Earnest

9.95% – 35.99%8$2,000 - $35,000

Visit Avant

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.

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