All debt is not bad, but it can be difficult to tell which are okay and which are like flushing money down the toilet. This article provides some pointers on what are usually considered “good” versus “bad” debts.

Is all debt bad? Of course not.

It’s nearly impossible to live your life debt-free. Debts can help you make purchases that would cause a serious hardship if you had to pay in full. Debt, just like anything else, can be either good or bad, depending on how you use it.

Good Debts

Debts can be good for you if they increase in value over time. The value of what you are buying must appreciate over time. A good investment also fits into this category, because you can expect returns. With a good debt, you are ultimately expecting to get something out of the deal more valuable than the debt.

Student loans are generally considered good debt. Your college tuition is an investment in your future, and even if you spend half your life paying them back, you will have the means to do so. A college degree is a great reason to take out a loan.

Money for houses are usually good debts, as long as it’s not a high-risk mortgage. When you weigh everything else into the bargain, including appreciation and the fact that you are throwing away money if you are renting, a house is usually a worthwhile reason to go into debt. However, the size of the debt can be a factor. If you are buying a house that is really out of your financial means, this good debt can turn into a bad one quickly.

Business loans are usually considered a good debt. If you take out a loan to start a business, you are expecting to make money, just as long as you don’t bite off more than you can chew. Keep it reasonable. Debts that will make you money are always good. If you want to buy a rental property and make some money renting it out, there would be no harm in taking out a loan for that.

Any debt that has a low interest rate can be a good debt, especially if you can pay it off quickly. If it is tax deductible, that is also a plus.

Bad Debts

Conversely, things that decrease in value over time are bad debts. Also, goods that are disposable are bad things to borrow money for. As a general guideline, anything that will not survive longer than the debt itself is not worth borrowing money for. This would include most small consumer goods and everyday expenses such as food and clothes. Clothes depreciate the minute you put them on, so borrowing money to buy them is just adding to the price tag. Going into debt for entertainment expenses is a big no-no. If you have a credit card with a high interest rate, anything you spend it on will be a bad debt. A high interest rate means that, no matter how much you pay each month, you will be adding greatly to the initial cost of whatever you buy.

Cars are often bad debts. This is not because of the car itself, but often because of the make and model. We generally buy more car than we need. If you buy this year’s model of SUV, you are locking yourself into an unnecessary bad debt. On the other hand, buying a reasonably priced car that gets good gas mileage can be a good debt. Any debt where you can’t make payments automatically becomes a bad debt. Keep this in mind before you borrow money! Any debt that could potentially ruin your credit rating is harmful. Finally, there are certain types of lending services that usually offer terrible deals. Top among these is payday loans. These loans are alright for the short term, but they charge ridiculously high interest rates. Also, avoid any loan where you are penalized for pre-paying.

As a rule, if you buy something that will not increase in value, pay cash. Keep yourself away from those bad debts.