When Debt Is Good To Have

Debt is a liability best avoided. Purchasing items with cash protects you from that liability. However, this isn’t always possible and financing is available for such cases.

Before taking on a new debt consider the following questions: Is this something you need but simply cannot afford to pay for outright? Will the purchase appreciate in value? Can all of the monthly expenses related to the purchase be paid comfortably? There are a few instances where the answer to those questions can be yes.

Mortgage

Finding a great deal on a house is far easier today than it was before the real estate bubble burst. However, paying for a house outright just isn’t feasible for many people. Fortunately, houses increase in value, and financing a prudent amount can be a wise investment versus paying rent.

A large down payment is always favorable when purchasing a home. Twenty percent or more down payment gets rid of the need for private mortgage insurance, or PMI, which protects the bank in case you stop making payments. Consider choosing a 15-year mortgage if possible. It means a slightly larger monthly payment, but will save you thousands of dollars in interest, making the investment more profitable.

Car

In many locations, a car is a necessity. Having reliable transportation to get to work is right up there on the list of priorities with food and shelter. Because a vehicle is so important, financing one can be a good decision.

Set a budget before shopping for a new car. Determine ahead of time how much you can comfortably afford per month. And remember, a financed car means higher insurance rates because comprehensive and collision coverage are required by the lending agency. Take that into consideration as you determine what you can afford. Also remember that a new car depreciates very quickly after being driven off the lot and so a reliable used car is a very wise choice.

Education

Investing in education is great way to spend money, providing the student with a life-long asset. Like purchasing a car or home, financing an education should only be done after other cost-cutting methods have been employed.

Many students are eligible for federal financial aid. Scholarships also abound for those willing to take the time to locate and apply for them. Even with all of that help, there usually tends to be a need for more financing. In that case, federally backed student loans are available to students with need. These loans offer very low rates and students do not need to begin repayment until after they graduate. In some cases, the interest paid on these loans is tax-deductible.

Money spent on these debts will yield greater dividends in the end. A home can build considerable equity; a direct way to validate your investment. Or the result can be indirect, as in the use of a car to take you to work where you will grow your income. Either way, good debts are investments that will yield a high return.

George Gallagher is a finance and education blogger.  He helps students with their own debt with not-for-profit student loan consolidation.