There Is No Such Thing As Bad Debt

by golbguru on December 6, 2007

Let’s sing a slightly different tune with this post - instead of the usual debt bashing. When I say “bad” debt, I am referring to the “good debt, bad debt” terminology that’s gathering some attention in financial circles - I am not referring to it in a classic technical definition point of view as “the portion of receivables that can no longer be collected“.

To understand the significance of debt in general, it’s instructive to imagine a society in which the facility to borrow money does not exist at all. Think in terms of education, industrial development, housing “requirements”, entrepreneurial endeavors, emergencies, and other aspects of our life that involve borrowing (and lending) money in some form or other.

While you are at it, try answering these questions: Would you be willing to wait till you are 35 years of age for higher education (think in terms of advanced graduate, law, medical degrees, etc.) - at which time you could probably pay for your entire education with cash in hand? Would you be willing to wait till you are 60 before you buy a home with your savings? How would you even start setting up a promising company/small business unit (say for example, a manufacturing unit) that would probably require a couple of million dollars of initial funding?

The common crucial denominator in the above issues is time - with respect to the psychological and physical (monetary) value associated with it. There are certain things in life that need to happen at the right time - whether you have the financial resources available at that time or not. In light of this, debt should be viewed not just as financial leverage - but also as leverage against time and as such, it has an enormous value when applied correctly.

In layman terms, the correct application of debt requires understanding the concept as timely financial help borrowed in the anticipation of future earnings. Most of the times, the part that says “anticipation of future earnings” is ignored or undermined or totally miscalculated and that’s where problems start appearing. Some people probably tend forget that any borrowed stuff needs to be returned in a timely manner and then, all of a sudden, money borrowed for good purposes becomes “bad debt”.

I think it’s naive to only bring up negative connotations associated with credit card business, payday loans, and subprime mortgages when talking about debt and painting the whole concept of borrowing money with a broad “debt is slavery” brush. Debt is slavery only when we use it mindlessly.

In summary, there is no such thing as “bad” debt - there is just bad implementation, unreasonable temptation, and occasional miscalculation. :) Like most financial issues, debt is simply a question of affordability and feasibility - there is absolutely nothing profoundly bad about it. Just my two cents.

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{ 38 comments… read them below or add one }

1 plonkee 12.06.07 at 5:08 am

I kind of think of debt as adding to the cost of an item. Some things it’s worth buying at a higher price, and other things it’s not.

In a modern economic system, debt is, as you say, just a tool.

2 Robert 12.06.07 at 5:42 am

While I think you could easily justify saying “debt isn’t always bad”, saying “there is no such thing as a bad debt” isn’t accurate. People can easily get into debt for “bad” reasons and often do. I agree with what you’re saying of course, but I think we disagree on the terminology.

That said, “bad debt” is used to refer to a debt that isn’t expected to be repaid and will likely be written off, so the the title you used is doubly off. :)

3 Mrs. Micah 12.06.07 at 6:26 am

Well I’m not sure if you’re right about there being no such thing as bad debt, it’s a very thought-provoking entry. Debt can be a good tool against time–it just means that life is more expensive. I don’t really regret Mr. Micah’s student debt, because he’s meant to be a professor and there’s really no way to do it without getting a PhD.

4 Fiscal Musings 12.06.07 at 6:29 am

I see the point you’re making (and it’s a good one), but it doesn’t really fit the title. As far as link bait goes, it’s a great title though.

5 Amanda 12.06.07 at 6:31 am

You make some very good points in this article but I think what you’re really doing is emphasizing not all debt is bad. I agree with that.

I am glad that funds were available to support my education. I’m also glad that I had a credit card those months that I didn’t have food to eat while getting it.

However, when you place yourself at the whim of creditors that are willing to raise your interest rates 200-300% with NO apparent reason, you have debt is a nightmare. How can you predict this kind of erratic behavior regardless of your anticipated future income? Quite often people borrow money on the assumption of specific terms then those terms change for reasons beyond their control. Debt can be used as a malicious and predatory weapon on those that need it most. Like it or not.

6 Harrison 12.06.07 at 6:32 am

Well, I believe that debt is just like a knife. You can use it to cut something and also to hurt someone. It only about how you use it or leverage it. In conclusion, we should avoid those unnecessary debts

7 Jeremy Bettis 12.06.07 at 7:22 am

Would you be willing to wait till you are 35 years of age for higher education - at which time you could probably pay for your education with cash in hand?

You have got to be kidding on this point. Go to a local public university and live at home with your parents. My expenses at the University of Nebraska were about $3500/year for tuition, fees and books. No room and board if you stay home. If you can’t make $300/month at a part time job as a student, then you aren’t even trying.

8 Beymer 12.06.07 at 8:24 am

A topic that does present some interesting discussion but supporting the fact that debt isn’t bad. I would agree that borrowing money does create opportunities for those who have an earning potential later on in life. Obviously there are some factors to not having debt.

Ron Price is a very knowledgeable man on finances. Listen to this video and you might want to rethink your argument about money. You might find yourself with more of it in the long run.

9 golbguru 12.06.07 at 9:38 am

Jeremy: “My expenses at the University of Nebraska were about $3500/year for tuition, fees and books.”

That’s good for you, but that’s not how it usually happens; how many people do you think get away with $3500 a year in tuition and fees AND stay with their parents while going to a college of their choice?

I attend a public university too. Forget about the living expenses; just the tuition and fees for 24 credits a year is about $11,000 for residents and $22000 for non-residents (including the summer semester). Add the living expenses and things could inflate a lot more. Yeah you could avoid studying in the summers, reduce the tuition a bit and get a full time job somewhere, but that’s not a global solution - there are many people who can’t do that.

10 Double Journey 12.06.07 at 1:22 pm

The same argument could be said that guns don’t kill people, people kill people. :)

But I digress. I agree with you, debt in and of itself is perfectly fine, and in fact really necessary for a well functioning capitalist society like our own. It is actually the management of debt that confounds so many people. I for one advocate that personal finance be taught as a subject to all High school students. What’s more important, learning about the stock market crash, or learning how to make sure you don’t have your own personal disaster?

11 MoneyNing 12.06.07 at 5:11 pm

As with everything, it is always the user that is responsible and not the fault of the system (debt). Even the worst debt can be good if used correctly.

12 jrochest 12.06.07 at 11:57 pm

This is a sensible response: we’re so used to thinking of debt as consumer debt that we forget that debt comes in forms other than credit cards, car loans, and over-extended ARMs.

Student loans didn’t kick in for me until I went to grad school and ran out of funding before I’d finished my dissertation. The sums that I racked up are daunting, but without them I’d not have my job, which is a wonderful one.

13 Tim 12.07.07 at 2:00 am

I agree there is no such thing as good or bad debt. Debt becomes bad when people take on more than they can afford or abuse the debt by not paying on time, etc.

I also disagree with the notion of predatory lending. Simply because those vehicles are out there, doesn’t mean that you should take up the offers. You know the terms and costs ahead of time. Having seen and experienced those places before, I find they are more upfront about fees than regular creditors who bury things in fine print. People simply ignore choose to ignore the terms and fees. This isn’t predatory lending, it is simply stupidity on the part of the people accepting those offers (yes, I was one of them before).

14 MoneyDummy 12.07.07 at 7:13 am

At the beginning of its cycle, the availability and utilization of debt may make a commodity more accessible, but in the long run it just makes the commodity more expensive and again inaccessible. Just look at what’s happened with the price of education since the eighties as student loans have become more available. Look at what happened to housing prices after the massively cheap and available debt started being offered in 2002. Bottom line: the more money that is available to be spent on an item, the more the item will cost, assuming demand supports the equation.

Let’s look at your hypothetical scenario: a society without debt. You propose that in that situation, people would either have to wait until they were 35 or forgo college altogether. That’s just crazy talk! If there were no debt available for education, then the education industry, in order to remain viable, would make itself affordable to a society which had no access to debt. Either that, or it would become antiquated and die off, making it so that it wouldn’t matter if you could afford it because no one cared about it anyway.

15 golbguru 12.07.07 at 7:51 am

MoneyDummy: “If there were no debt available for education, then the education industry, in order to remain viable, would make itself affordable to a society which had no access to debt.” - that’s an idealized view, but not at all practical. Yeah, we could all walk to work if cars were not invented in the first place.

Also, if education was cheap and affordable all the time, then there would have been no market for loans - as such, it’s the high cost of education that comes first and then the need for loans - not vice-a-versa as you are implying.

Delaying education was just one of the examples, there is no need to get stuck up at “35 years of age”. It helps to look beyond education to understand the scenario - think about startups; how do you think it would become viable to start a aircraft manufacturing unit (for example), without borrowing anything to begin with? Where would you “invest” (cough*lend*cough) if no one was looking to borrow your money? Plus, we can say a lot more about how making borrowing difficult can lead to a general recession, but we will discuss that some other time.

16 MoneyDummy 12.07.07 at 10:20 am

Perhaps you and I have different definitions of “affordable.” Based on what tuition cost and what people were making, it seems like lot of people took out loans simply to avoid working while in college, not because they literally couldn’t make enough while in college to pay for their tuition.

You make a good point about making money through lending it to others, which necessitates that someone borrow it, but there are other ways to invest also, aren’t there? I’m not an expert, but don’t most stocks, for instance, simply have their owners own a tiny piece of the company rather than lend the company the money? Couldn’t that also be the answer to your challenge about how companies would be started? (Just so I’m clear, I’m not proposing that we could or should abolish debt, just banging around some of the scenarios you brought up.)

Finally, so I understand you, do you really believe that the availability of funds to be spent on a product DOESN’T drive up the product’s cost? Based on both logic and historical observation, it seems obvious to me that it does, but maybe there’s an economic model or principle that I’m missing.

17 Rose 12.07.07 at 5:20 pm

I can identify with what you are saying. Although it is becoming increasingly hard to maintain financial stabability there is such a thing as “good” debt. Having good debt means that you have a good credit rating which is necessary when you want to take out a loan. I have also heard that having good credit will be beneficial when you want to get a new apartment. And its other things too - meaning that having a good credit rating can prove to be benefical in a number of ways.

But maintaining it is becoming harder to do.

18 dan 12.08.07 at 8:55 am

i didn’t like going to school when i was a teenager, there’s no way i’d do it now (and i just turned 35 on 11/27). here’s hoping i can win powerball so i don’t have to worry about debt.

19 Blake 12.08.07 at 11:02 am

I like to believe that debt on things that appreciate in value is good while debt on depreciating things is bad.

I don’t mind taking out big student loans for the next 4 years at a private college, because it’s an investment that will pay itself off many times over.

I most definitely do not want to take on debt for a car. There’s enough expenses involved with owning a vehicle, I don’t want monthly payments on something that is depreciating fairly rapidly.

20 barry b. 12.08.07 at 2:50 pm

The problem is our culture is full steam instant gratification. Buy now pay later.

21 chris 12.09.07 at 2:55 pm

You as a home owner will always have debt. Your house is a debt, but also an investment. Just like student loans. Your education is an investment, the loan is a debt. Same thing with a car.
I don’t care how financially stable you are, you still have some sort of debt.

22 used vans girl 12.10.07 at 2:03 am

I kind of agree with what you are saying that debt is a necessary evil that we couldn’t do without if we want to advance. However I don’t think there is such a thing as good debt or bad debt for that matter. While I was at college most of the students on my course took out loans, some of those debts were well managed and paid off long ago and others are still building up. They were all fundamentally from the same debt, they were just managed differently. It’s how you manage the debt that’s important whether it’s for a good purpose or not.

23 MossySF 12.10.07 at 10:09 am

Research has shown college costs being highly correlated with available student loans. There was one blatant example where a school raised tuition the moment Congress increased the student loan limits. Perhaps there would be a period of pain and adjustment if debt financing of education went away. Certainly less people could go to college but I suspect employer requirement for college degrees would go down also.

24 Patrick 12.10.07 at 4:40 pm

I think you’re onto something with this quote: “debt should be viewed not just as financial leverage - but also as leverage against time.”

I agree with this statement, especially when it comes to education. Education can bring such great returns that it doesn’t make sense to pass it up for several years until you can afford it. Not only does the cost of education rise in the meantime, but your earning power takes a big hit.

People run ROI exercises on MBA programs and other educational programs, and there is almost always a break even point within a few short years.

Another example where this works is in a business situation, where an injection of borrowed capital can result in paying great dividends.

25 vh 12.10.07 at 5:49 pm

“Research has shown college costs being highly correlated with available student loans”…

Thank you! And spot on!

The highly ambitious president of the university where I work, which is fast being turned into a megacorporation, excuses the exorbitant tuition raises he has engineered by claiming that when tuition rises, more funding is available to students. Read “more debt is available.” Understand: you’re not getting any improvement in the education your creditors are buying for you–you’re just getting deeper in debt.

That said, the cost of a four-year degree at a decent public university is about the same as the cost of a new car. Car’s value depreciates; over time, a degree can help you earn lots more than you might without it. Would you rather borrow for something that loses value or gains value?

I dunno if there’s no such thing as “bad debt,” but surely there are different qualities of debt.

26 E.C. 12.10.07 at 9:38 pm

I’m not sure I understand Chris. Why does being a homeowner mean always having debt? There are people like my parents who paid their 30 year mortgage off in less than 15 years, pay cash for cars, and got college degrees without taking out loans. They don’t have debt right now, although they were willing to use it as a tool in the past.

27 yorkie 12.17.07 at 2:32 am

I agree with you E.C.
Maybe it’s being poor most of my life, but I hate having debt. My wife and I hope to pay off our house this year which would make it less than 6 years. We still have 1 car loan and we hope to pay off that soon as well.
I think the key to being debt free is to be realistic with your spending and knowing what you truely afford.

28 Minimum Wage 01.09.08 at 3:15 am

When the “anticipated future earnings” are not realized, the debt becomes bad debt.

My student loan debt is nothing but a huge albatross* around my neck.

* are the English familiar with this concept, or is it peculiar to Americans?

29 savingadvice 03.19.08 at 9:41 pm

True many things would not be possible without debt, or at least not as easy. It’s always good to see different points of view.

30 financiallyenhanced 06.16.08 at 3:48 am

Great article. I can see what point of view your coming from, and yes debt is generally a great thing if you can afford to pay it off. Having debt can increase your credit rating and allows you to be able to ‘put away’ money, as if you were saving.

31 Online saving 09.01.08 at 1:21 pm

The plain fact is, that a lot of people are in trouble. And to get out of financial trouble, they’re robbing Peter to pay Paul to get over the hump.

You make some very good points in this article but I think what you’re really doing is emphasizing not all debt is bad. I agree with that.

32 Property Marbella 07.23.12 at 5:16 am

Think in terms of education, industrial development, housing “requirements”.

33 outsourcing services 10.29.12 at 1:19 am

what point of view your coming from, and yes debt is basically an exceptional thing if you can afford to pay it off. they’re robbing Peter to pay Paul to get over the’re really doing is emphasizing not all debt is bad. I agree with that.

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