The familiar distinction between good debt and bad debt sorts borrowing by what it buys:
education and property good, consumption bad. It is a reasonable rule of thumb and it misses the
factor that determines most outcomes, which is price.
Rate and term matter more than purpose
A loan for a sensible purpose at a punitive rate is worse than a modest balance at a low one.
What makes debt manageable is the cost of carrying it relative to what it enables, and whether
the repayment period is shorter than the useful life of whatever was bought. Borrowing over five
years for something that will be worthless in two is a poor arrangement no matter how the
purchase is categorised.
This reframing has a practical use. When several balances compete for the same limited
repayment capacity, the one to attack first is the most expensive, not the one that feels least
respectable.
The question worth asking
A more durable test than good or bad is simply whether the borrowing increases what you can
do later or decreases it. Debt that buys an asset or a capability — something that raises future
income or avoids a larger future cost — can leave you better off. Debt that funds consumption
moves spending from the future to the present and leaves less later, which is sometimes a
reasonable trade and should at least be a conscious one.
Either way, know the rate, the term and the total you will repay before signing. Those three
figures tell you more than any category ever will.
