The Difference Between Good Debt and Bad Debt

Dilleen Property Group 2022

It is important to understand the difference between good debt versus bad debt, especially when getting into the investment game.

In this blog post I will discuss the difference between the two and provide some examples. This is something I learnt myself when I was about 19-21 years old when I started reading a lot of investment books. One of the most memorable ones was ‘Rich Dad Poor Dad’ by Robert Kiyosaki, which helped me learn about different income and asset classes, good and bad debt, etc.

Bad Debt

Some examples of bad debt would be:

-          Car loans

-          Personal loans

-          Credit card

-          After pay services – Clothing, TV, Computer, Furniture

All this stuff is considered bad debt because it is depreciating in value. If you purchase a car for $30k - $40k it is going to be worth a whole lot less within the first five years of owning it.

If you want to have more money in the future you should be buying things that go up in value.

I strongly recommend that before you get a car loan, personal loan or credit card or go into debt to buy luxury items such as handbags or designer items, you think about if you really need that. If you don’t have the money in the bank you should not be splurging on items like this if you are going to end up complaining about it in the future.

Good Debt

Next is good debt. Now, I know a lot of people may not agree with me in saying that this is good debt but what I classify as good debt is any debt that is going to help you increase your wealth or net worth like an investment property.

Some examples of good debt are:

-          Investment property loan

-          Business loan

The difference between an investment property loan and a personal loan is that with an investment property loan you get to claim lots of deductions on an investment property loan such as council rates, water rates, management fees, insurance, strata interest, etc. so you are going into debt, while the property is increasing in value, and you are also able to receive rental income as well. If the property is taking care of itself, I consider this good debt.

In terms of a business loan, this can also be considered good debt if you are using it to your advantage. All the successful scalable business use debt to their advantage to leverage and scale to essentially make more money in the long term.

Disclaimer: This is not intended as legal, financial, or investment advice and should not be construed or relied on as such. Before making any commitment of a legal or financial nature, you should seek advice from a qualified and registered legal practitioner or financial or investment adviser.