Good Debt vs Bad Debt
Not all debt is equal. The difference between debt that builds wealth and debt that destroys it comes down to what it funds, what it costs, and whether you can handle it.
The Spectrum
Debt isn't binary — it exists on a spectrum from wealth-building to wealth-destroying. The same type of debt can be "good" or "bad" depending on the terms, the amount, and your situation. A mortgage is great if you buy within your means; it's catastrophic if you overextend. Evaluate every debt decision on four factors: the interest rate, what it funds, whether it builds assets or funds consumption, and your ability to service it.
Potentially Good Debt
Mortgage
Builds equity in a real asset that historically appreciates. Usually the lowest interest rate you'll ever get. Forced savings mechanism — every payment increases your ownership stake.
Only "good" if you buy within your means. An oversized mortgage on a house you can barely afford is still bad debt.
Education
Increases your earning power over a lifetime. The ROI on the right degree or certification can be enormous. Invests in an asset nobody can take from you — your skills and knowledge.
Highly dependent on the field, institution cost, and job market. A $200K degree with $40K earning potential is bad debt wearing a graduation cap.
Business Loans
Funds income-generating assets. A loan to buy equipment that produces revenue, or to scale a proven business model, can multiply your money many times over.
Only applies to businesses with proven revenue or clear demand. Borrowing to fund an unvalidated idea is gambling, not investing.
Low-Rate Investment Leverage
Borrowing at low rates to invest in assets with higher expected returns. This is how most real estate investors build portfolios — using leverage to amplify returns.
Advanced strategy. Leverage amplifies losses just as much as gains. Not for beginners, and never with money you can't afford to lose.
Usually Bad Debt
Credit Card Debt
Interest rates of 15-25% make this the most expensive common debt. Usually funds consumption — meals, clothes, impulse purchases. Compounds aggressively against you.
Car Loans on Depreciating Assets
A new car loses 20-30% of its value in the first year. Financing a luxury car you can't afford in cash means paying interest on something worth less every month.
Payday Loans
Interest rates of 300-500% APR. Designed to trap borrowers in cycles of debt. Almost never the right choice — even credit card debt is preferable.
Consumer Debt for Lifestyle
Financing holidays, electronics, furniture, or experiences on credit. If it won't generate income or appreciate in value, borrowing to buy it means you can't afford it.
The Evaluation Framework
Before taking on any debt, run it through these five questions. If most answers point toward "no," reconsider.
Does this debt fund an appreciating asset?
Is the interest rate below my expected investment returns?
Can I comfortably service the payments?
Would I still want this if I had to pay cash?
Am I borrowing out of necessity or impatience?
Interest Rate Context
Interest rate is one of the most important factors. Here's what typical rates look like across different debt types — context matters.
If You're Debt-Free
Stay intentional. The only debt worth considering is debt that funds assets or increases your earning power at a rate that exceeds the interest cost. If in doubt, don't borrow. Being debt-free is an underrated financial superpower.
If You're Considering Debt
Run it through the five-question framework above. Shop for the lowest rate possible. Never borrow the maximum you're approved for — lenders profit from your debt, so their limit is not your limit. Sleep on it. If urgency is pushing the decision, that's a red flag.
If You're in Debt
Prioritise high-interest debt first — credit cards and payday loans are emergencies. Don't add new bad debt while paying off old bad debt. Low-rate debt like a mortgage can coexist with investing. Use our debt payoff calculator to build a plan.