4 Types of Debt That Can Actually Be Good for You

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Debt is practically a part of modern life. Most people can’t get a college education without borrowing, and buying a home often requires a mortgage.

Using debt to get ahead in life isn’t necessarily a bad thing, according to Andrew Housser, the co-CEO of Freedom Debt Relief, a debt settlement company.

“Think of it as productive versus unproductive debt,” Housser said. “Know exactly what you are borrowing for and have a plan for how you will use the money.”

With that in mind, here’s how you can answer the question, “What is good debt?”

What is good debt?

There are two main factors you can use to determine if you’re looking at productive debt. Here’s what to consider.

Interest rate

Start with the interest rate, recommended Larry Ludwig, a personal finance expert and the founder of financial education website Investor Junkie.

“Look for an interest rate below 7.00%,” Ludwig said. “Typically, bad debt has an interest rate above that and no return on investment.”

Housser agreed that interest rates play a big role in whether debt could be considered “good” or “healthy,” with the caveat that productive debt should have a fixed interest rate.

“Your payments should be predictable,” Housser said. “They should be affordable within your budget so that you can still meet your other obligations and goals, including emergency fund savings.”

Return on investment

In addition to getting a low interest rate, good debt offers a return on your investment, such as a degree, a home, improved cash flow, or another way to help you build wealth, according to Ludwig.

Housser pointed out that you should be able to continue benefitting from the debt six months down the road. “Coffee drinks and music downloads, and even vacation loans don’t exactly qualify,” he said.

Don’t necessarily consider a tax benefit a return, warned Ludwig.

“As we’ve seen recently, tax laws change,” he said. “Possible home interest deductions are icing on the cake, but they shouldn’t be the reason you purchase an investment property to take on currently deductible debt.”

4 types of good debt

With that in mind, what’s good debt? Here are four investments that might be worth the cost of borrowing.

1. Mortgage

“Homeownership is an asset that can help you build equity and net worth,” said Housser. “That makes it productive.”

At the same time, though, you don’t want to get in over your head. Figure out how much house you can afford, and keep your payments low, Housser suggested.

Ludwig pointed out that getting a loan on an investment property can also be a wise use of debt. He’s used debt to purchase properties that generate regular cash flow through renters, with the added bonus of having someone else’s money building equity with each monthly payment.

When investing in property, start small. Make sure you can comfortably handle the payments and that there’s a good rental market before you go into debt, Ludwig said.

2. Student loans

Housser and Ludwig both said student loans can be worth the debt if you approach them wisely.

A degree can provide you with greater opportunities to advance in your career and make more money over time, Housser pointed out. However, it’s important to be careful about how much you borrow, whether in federal or private student loans, and the type of degree you get.

Spending $100,000 on a degree at a prestigious university might not make sense if you’re going into a low-paying field. Instead, Ludwig recommended considering your long-term return on investment and lowering your expenses by:

3. Business debt

Loans can help you start a business that could result in long-term income and wealth. Housser said that, while there are some businesses that can be started on a shoestring budget without borrowing, other ventures require more capital.

As with other types of debt, though, Ludwig said to approach business loans carefully. Be realistic about what you need to get started and borrow no more than what’s necessary. As you begin to see revenue, you can use that money to expand your business.

A good business plan can help you direct your resources in a way that helps you grow your enterprise. Over time, you can create cash flow to pay down your debt and begin building wealth, said Ludwig.

4. Auto loans

While some experts don’t think of borrowing for a car as a good thing, Katie Ross, the education and development manager for American Consumer Credit Counseling, a financial education nonprofit, said that it sometimes makes sense to invest in a vehicle.

“Good debt can be an investment,” Ross said, “and your vehicle qualifies if you need one to take advantage of career opportunities that make up your income.”

That doesn’t mean that you should go out and buy an expensive luxury car, though. Instead, get the cheapest car you can that will get you to work. In areas where public transit is unreliable or practically unavailable, a vehicle can be a necessity. And while paying in cash is ideal, you may need a loan to afford a car.

Keep good debt from going bad

Even though some debt is considered good, it doesn’t mean that things can’t go horribly wrong.

“No debt is inherently good,” said Ross. “Even though some loans may present opportunities, no debt comes risk-free.”

Justifying debt because it’s considered good could lead you to overextend yourself. You might end up with payments you can’t afford or problems if your income is unexpectedly disrupted, for example.

Rather than taking on as much debt as a lender allows, carefully consider your needs. And make a plan to pay back your debt as quickly as possible.

If you’ve borrowed too much, Housser recommended making lifestyle changes to spend less and turning to financial tools. To make payments manageable, for example, you could use debt consolidation loans for unsecured debt, student loan refinancing for private student loans, or income-driven repayment for federal student loans.

“In the end, debt is still debt,” said Ross. “The idea of creating value down the line hinges on financial planning to eventually benefit you and your credit score.”

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1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Personal LoansFixed rates from 6.58% APR to 14.87% APR (with AutoPay). Variable rates from 6.275% APR to 12.575% APR (with AutoPay). SoFi rate ranges are current as of July 16, 2018 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 6.275% APR assumes current 1-month LIBOR rate of 2.10% plus 4.175% 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. 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 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  • Personal Loan Rate DisclosureFixed interest rates from 6.49% – 19.49% (6.49% – 19.49% 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.
  1. 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.
  2. 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.

* Important Disclosures for Upgrade Bank.

Upgrade Bank Disclosures

  • Personal Loan Rate DisclosureFixed interest rates from 6.49% – 19.49% (6.49% – 19.49% 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.
  1. 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.
  2. 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.
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5.99% – 18.99%2$5,000 - $50,000Visit Citizens
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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.