Knowing the Difference between Bad Debt and Good Debt – Financial Facts

Knowing the Difference between Bad Debt and Good Debt

Why do you borrow money? Usually, you borrow money because you don’t have enough to buy something you want or need — like a university or college education. A four-year university education can easily cost $30,000 to $60,000, and double that if you include residence, room and board, or renting an apartment. Most people don’t have that kind of spare cash. So, borrowing money to finance part of that cost enables you to buy the education.

How about a new car? A trip to your friendly local car dealer shows you that a new set of wheels can set you back $25,000 or more. Although more people may have the money to pay for that than, say, the university education, what if you don’t? Should you finance the car the way you finance the education? The auto dealers and bankers who are eager to give you an auto loan say that you deserve and can afford to drive a nice, new car, and they tell you to borrow away (or lease, which we don’t love either — see Chapter 6).

We say, “No! No! No!” Why do we disagree with the auto dealers and lenders? For starters, we’re not trying to sell you a car or loan from which we derive a profit! More important, there’s a big difference between borrowing for something that represents a long-term investment and borrowing for short-term consumption. If you spend, say, $1,500 on a vacation, the money is gone.

Poof! You may have fond memories and photos, but you have nothing of financial value to show for it. “But,” you say, “vacations replenish my soul and make me more productive when I return — the vacation more than pays for itself!” We’re not saying that you shouldn’t take a vacation. By all means, take one, two, three, or as many vacations and trips as you can afford every year. But the point is to take what you can afford. If you have to borrow money in the form of an outstanding balance on your credit card for many months in order to take the vacation, then you can’t afford it.

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