Cheap Loans and Good Debt versus Bad Debt

By Pinyo, on April 12, 2009

I am sure you hear a lot about good debt versus bad debt, and how some debt are better than others. Last week, I came across a quote at How to Make 7 Million in 7 Years that’s worth repeating here:

You see, the concept of good debt and bad debt only applies when you are deciding whether to take on debt or not. Once you have acquired the debt, there is no more good debt / bad debt anymore … there’s only expensive debt and cheap debt.

Good Debt versus Bad Debt

Although we occasionally see things differently, AJC absolutely nailed this one on the head. This is exactly how everyone should look at debt. The question of good versus bad only matters in the context of whether or not it’s valuable for you in the long-term, and should you take on that debt.

For example, taking out a mortgage is probably better than putting your next vacation on a credit card. Another example is a student loan versus a car loan. I’m using the word probably because it’s all relative and specific to each person (for example, a taxi driver taking out a car loan on his taxi is probably taking on a better debt than a student taking out a student loan for his 3rd Master’s Degree).

Cheap Loans versus Expensive Loans

Good or bad is no longer relevant after you acquire the debt. The only thing that matters now is how cheap or expensive it is. For example, which one would you rather pay off first — a bad debt with 5% interest or a really good debt with 8% interest? I hope you answered paying off good debt first because it’s more expensive.

In a way, this is similar to the argument made against Dave Ramsey’s version of the Debt Snowball where he encourages you to pay off the smallest balance first. Personally, I think it’s better to pay off the most expensive debt first regardless of the balance. If you really need the psychological boost, you’re better off celebrating each time you pay off a tenth of your total debt.

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Pinyo is the brain behind Moolanomy personal finance blog and a few other web sites. If you like this article, please subscribe for free daily email updates.

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