The Difference Between Good & Bad Debt

January 16, 2020

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Some people will tell you there’s nothing wrong with being in debt. 

Others will say debt is bad and you should do everything in your power to stay out of it, not matter what.

It’s the same as when people say ‘money doesn’t buy happiness’.

They’re right…

But try being truly happy without money in the modern world, and you’ll probably arrive at a different conclusion. 

The truth about debt is probably somewhere in the middle.

Most New Zealanders wouldn’t own a home, for example, if they weren’t in debt with a mortgage. 

Others wouldn’t own their car. 

So let’s weigh up what type of debt is ‘good’, and ‘bad’. 

The Good.

Good debt, in a nutshell, is a loan that will help you improve and strengthen your financial position over the long term.

Consider the phrase ‘it takes money to make money’.

If you’re borrowing money to study, you could consider that good debt because it will increase your ability to earn money once you get the qualification. 

If you’re borrowing money to build a business, that too can be considered good debt, since you might be investing in new equipment or staff to expand your operation. 

The same goes for buying a home or any other asset that could add financial  value to your situation. 

The Bad.

Bad debt comes in two forms. 

The first is when you borrow money to buy something that doesn’t add any substantial value to your life.

Like a shopping spree or a week-long bender in Bali that you can’t afford. 

The second is when you borrow money at a rate that means your repayments have a significant negative impact on your weekly budget. 

High interest credit cards and payday loans fall into this category. 

A payday loan could cost you three times what you get when you borrow it.

That is textbook bad debt.

The Sensible. 

The reality is when many of us decide to take a look at our finances and make some changes, we’re already in debt, maybe through no fault of our own. 

And while on the face of it, borrowing more money would seem like a bad idea…

One exception is debt consolidation

Debt consolidation is when you take one new loan to pay off all your existing loans in one hit.

The new loan clears your old debts, and you pay it back at a lower interest rate than what you were paying before. 

This accelerates how quickly you get out of debt and — ideally — lower your repayments to improve your weekly budget.

If you have any questions about debt consolidation, get in touch with us on 0800 461 228 or email us directly at [email protected].

You’ll speak with a dedicated debt consolidation consultant who can walk you through how you might be able to pay down your debt faster with a consolidation loan. 

See for yourself with our easy-to-use debt consolidation calculator.