On the surface, all debt might seem to be a bad thing. After all, we frequently hear people talking about how to get out of debt. But in reality, not all debt is bad. Some types of debt allow us to improve our situations and even see a financial return. Those debts are sometimes referred to as “good debts.”

Let’s take a quick look at the difference between bad debts and good debts and some examples of good debts.

Bad Debt vs Good Debt

A bad debt is one where you go into debt without some kind of investment behind it. In the end it does little more than cost you money. You might get some up front gratification (like a vacation), but it doesn’t last. You end up paying for something even after it no longer has value. A good debt, on the other hand, is one that helps you reach larger financial goals and potentially even make money.

Examples of “Good Debt”

Here are three examples of debt that can be considered “good” for your financial situation:

• Mortgages — Buying a house is generally a good investment in the long term. And that makes mortgages a good debt for many consumers. Investments in general can be considered good debts as opposed to using debt to finance more immediately consumable items.
• School loans — This example of potentially good debt is a bit more debated. But if you attend a reasonably-priced school for your degree and you pursue a career where your degree will help you earn more than you paid for your education, it’s a good investment and therefore good debt.
• Car loans – Like school loans, car loans aren’t always good debt. It comes down to the return. A loan for a luxury car for leisure purposes isn’t good debt (although there’s nothing wrong with it as long as you can afford to pay it off). But a loan for a less expensive car that enables you to pursue a higher paying job can be considered a good debt.

In the end it all comes down to what you get back versus the expense of the debt. If you come out ahead, the debt can be considered a “good” debt. If it costs you money and you have nothing to show for it down the road, it’s a debt you should be more cautious of. Where do your debts fall?