Understanding Debt

It's impossible to understand debt consolidation without first understanding debt. Here, we'll discuss the difference between good and bad debt.

Benign Debt

Of course, no type of debt is really "good" to have, but some forms of debt are better than others. Our goal is to help you better understand debt consolidation, which deals only with certain forms of debt because they are the most dangerous and expensive. In this section, however, we'll discuss the types of "good" debt. In some cases, debt can actually help you build wealth, such as by buying a home, getting an education, or starting a business. All of these endeavors will ultimately increase your wealth; your home will appreciate in value, your education will raise your earnings, and your business will earn profits. The common denominator of these investments is that they all increase in value after the initial cash outlay. Items with the potential to gain value over time are integral to the concept of good debt. To summarize, here are a few examples of benign or value-added debt:

• Home loans
• Education loans
• Business loans
• Real estate loans (i.e., those used to invest in properties other than a primary residence)

Malignant Debt

By now, you should understand debt consolidation thoroughly enough to know that its primary target is bad, or malignant, debt. Bad debt usually ensues when you buy something that immediately loses value, such as movie tickets, furniture, or even a vehicle. Purchasing such items on high-interest credit cards would not lead to bad debt if consumers had the discipline to pay the balance off in full each month, but most do not. Most forms of bad debt are unsecured loans, like credit cards, but some types of secured loans, such as auto loans, also qualify. Here are a few examples of bad debt:

• Store credit cards
• Car loans
• Credit cards

Now that you know more about debt, you are ready to learn more about different ways to consolidate debt.