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The Best and Worst Debt

Almost all of us out there have debt of some sort. I am not a Dave Ramsey guy who thinks that all debt is bad and you should make it your first mission to get rid of all debt. But debt is generally not a good thing, by the simple logic, would you rather have no debt or some debt? You’d say no debt right? But debt is not a single thing, it comes in many forms and can be any where from helpful and prudent, to horrifyingly bad.

From Best to Worst:

Fixed Rate Mortgage Debt: Debt on your house is on the end of helpful to prudent. If your choice is rent or pay for a mortgage near the same amount then the choice is not that hard just to buy (there are always exceptions and things to think about). Mortgage Debt especially fixed rate debt is a very stabilizing factor in your financial life, long-term it could help you achieve tremendous benefits, and build a large amount of wealth.

Variable Rate Mortgage Debt: Now the only problem with this debt is the additional risk you are taking with interest rates. Honestly, 8 out of 10 times from a financial perspective you are probably better off with a variable rate mortgage, but its those other 2 times that are the problem. If rates go up and you also hit any other financial issues at the same time, you could end up in trouble.

Car Loans: Again it would probably be better to just own your car out right, and hopefully if you keep the car long enough you will. But for younger people that’s not really that feasible and in many cases you just need a car. So having some debt that helps you meet a need you have that helps you generate income, like getting to and from your job, is not a terrible thing. The problem many people run into is just rolling over that debt continuously… New car every 2 – 4 years anyone? That’s where it starts to become more of a negative than a positive. The aim long term should be to have enough savings that you can just buy your car outright and then use them for a good long time.

Credit Cards/personal loans: Now we are getting into the mostly bad debt. The only time this debt is kind of good is when you are having a short-term cash crunch for some reason, and these kind of loans allow you to navigate that period better. I have personally used personal loans to do that many times, knowing its cash that I just need for a few months while something else comes together. But if you have this debt all the time, that’s not a good situation. First off its expensive! Second it means something is wrong at a deep level with your personal finances, you are spending more than you are bringing in… you are breaking the first rule of being financially fit. This debt should be a huge yellow flag to you if you have it on an ongoing basis.

Payday loans: Now we are deep into the terrible territory. Do they have a purpose? yes in very rare and bad situations they may be more good than bad, but in most situations having this kind of debt is a giant RED FLAG! If your situation is so dire that you are using this type of debt, you might want to go to family, or church or someone to figure you how and what needs to change.

Loan Shark/Mob Loans: Okay you’ve hit the bottom of the barrel here. I don’t know what to say but please don’t hang around with me or my family just in case someone comes by looking to collect!!! 🙂 We’ll put this in the horrifyingly bad category!

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