'Good Debt' is explained in detail and with examples in the Corporate Finance edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.
Good debt is debt that benefits a person or business to carry. Such good debts demonstrate both the creditworthiness and the responsibility of a borrower. They also create a good base to build on in the future. There are many examples of good debt, which stands in contrast to bad debt.
Good debts are typically those debts that are taken on to acquire an item or investment that only grows in value with time. Examples of this include things like real estate loans, schooling loans, home mortgages, business debt, and passive income investments. Each of these items could provide a significant and real advantage with time. Real estate could increase in value and be resold for profits.
Higher education commonly leads to greater amounts of earnings. Loans on homes are commonly wonderful for building credit and provide properties that serve as excellent collateral. Loans for businesses may result in profits earned from trade and sales. It is important to note that cars and other items are not included in these lists. This is simply because they lose value the moment that they are purchased and driven away.
Bad debts in contrast are those that result in higher interest rates and considerable deprecation of the items purchased with time. Goods that are for short time frame use and bought on credit are commonly considered to be bad debts. Since the item’s life span will only decline with time, and the interest rates are typically high, no benefit is derived from purchasing these things with debt. A great number of such purchases rapidly decline in value, even after one use.
A significant benefit to good debts lies in the increase in cash flow that they commonly create. Properly structured good debts lead to tax advantages, to the ability to invest in still more assets that can produce cash, and to higher credit scores as well. Good debts that are paid on time furthermore build up a good financial base for the future. Good debts create cash flow, which stands in contrast to bad debts that do not.
Investments that produce passive income are among the best good debts. For example, purchasing an apartment building using debt will result in both income revenue and substantial tax deductions. This proves to be good debt, since although you are borrowing money, you are receiving passive income and gaining the ability to depreciate assets that can actually appreciate with time. On top of this, you are allowed to live there while you accrue all of these other benefits.
When considering a good debt, you should make certain that the income that the investment will provide is high enough to make the investment and the accompanying debt worth while. A number of experts offer advice on this. They suggest that not tying up in excess of twenty percent of your overall value in debt is a better practice. Higher debt levels than this can sound off warning bells with banks and other lenders.