Definition of good debt vs. bad debt
The defining line between good and bad is what a debt provides you in the long run. Good debt gives you something that benefits your life in general. You basically have something of value that you keep even after paying off the debt. On the contrary, bad debts do not pay you long-term benefits. They only leave you a debt.
But that line can be a bit confusing. You may feel like you are getting something out of bad debt. For example, if you use a credit card to buy an HDTV, you get something of tangible value: the television. But the value of that property decreases significantly over time. It is not like a house, where the value of the property generally increases over time. That is why a mortgage is good debt.
Things get even more confusing when it comes to auto loans. The value of a new car depreciates quickly as soon as you take it off the lot. You will never be able to sell the car and get all the money you put into your car loan back. Therefore, you do not get something of long-term value. But a used car loan to finance a classic car purchase would be different because the value of the vehicle does not depreciate in the same way. Therefore, some auto loans can be considered good debt.
This chart provides a basic breakdown of which debts count as good and which as bad. We explain more about why each type of debt falls where it does.
Federal Student Loans
Private Student Loans
A few auto loans (collector’s cars)
Home Equity Loans and HELOC (Typically)
Credit card debt
Payday and Pawn Shop Loans
Most auto loans (both new and used)