Home > Managing Debt > Is There Such a Thing as ‘Good’ Debt?

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As unfortunate as it may be, many of us are going to be faced with debt at some point in our lives. Whether it’s credit card bills, student loans, or a mortgage, there are numerous ways debt can weasel its way into our finances. But what if I told you that debt didn’t have to be a bad thing? While it isn’t always the best way to get the things we need, debt can be an incredible financial tool if used effectively.

So, to help you minimize the chances you’ll take on bad debt, here are five questions you may want to ask yourself before signing off on your next major loan.

1. Is This The Best Way to Get What I Need?

Before taking out a personal loan or opening up another credit card, you should consider asking yourself if this is the best option for you. For example, is it really necessary to purchase a new car with this new car loan right now or can it wait till you have more money saved? Rather than paying interest, maybe it’s best to wait until you have enough money to purchase this outright or at least take on a smaller loan size.

2. Can I Afford the Monthly Payments?

You may have enough money for the down payment on your loan, but you should ask yourself if you will have enough money to make monthly payments for the next five-or-so years. Can you truly afford the payments? If you think you will be struggling, then your debt can go from “good debt” to “bad debt” rather quickly. When adding this additional debt, always try and find out what your term is. This will feel like an end-goal knowing you can have this debt paid off in five years, if you can afford it, rather than 10.

3. How Does My Credit Look?

Before taking on any new debt, you should consider checking your credit report and make sure that you haven’t had any missed or late payments. This is important because if you have managed your debt well in the past, then you’ll get better loan terms in the future. If you have a good credit score and credit report, then you may get a better loan. If you don’t, then sometimes it is harder to get the loan you are looking for, especially if it’s a larger loan from a private lender. It’s a good idea to check your credit before you fill out any applications. You can do so by viewing your two free credit scores each month on Credit.com.

This goes the same for a credit card. Before you receive a new credit card, you first have to see if you qualify or have enough credit for one. If you have bad credit or a low credit score, your application may be denied.

4. Will This Debt Overwhelm My Budget?

As you get older, saving becomes more and more important. Before taking on this new debt, try and make sure that you will still be able to save towards your retirement or savings. To make this easier, consider budgeting. Add this additional debt to your budget to see how much leftover money (if any) that you will still have. If your budget is tight, then consider cutting back on your payments to your savings account. Instead of contributing 10% of your income to your 401K, maybe stick with 5% until you can fully manage paying off your new debt.

5. Is This a Reputable Lender?

Whether you trust your lender or not, when taking out a loan you should consider getting a second opinion. Try not to go with the first bank that offers you a flat interest rate. Shop around for interest rates and terms before making your decision. You want to make sure that you are taking out the loan that is right for you, don’t be pressured to make your decision right away.

Depending upon how it’s acquired, debt has the potential to be a major burden or boon on your life. Before signing on the dotted line, consider taking the time to ask yourself these questions to make sure this new debt is right for you. Debt has the power to make or break your financial future, so you may want to be sure you give it as much time as you can to think over the situation.

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