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Is there such a thing as good debt?

Usually when one says they have debt this is taken as a negative. However, there could be more to this debt than meets the eye.

Not all debt is alike—and not all debt is bad. It’s very reasonable to carry a mortgage or a car loan. What is needed is that you pay attention to the cost of the debt. If you have a revolving debt on a credit card that’s charging you 18% per year, you’re in a bad situation. If your student loan is costing you 6% per year, that’s not as worrisome.

Another consideration is what else you might do with the money you would use to pay off a low-interest loan. Imagine that you’ve borrowed $5,000 at 6% and you now have the money to pay it off in full. You could do so, but consider the alternative. If you’re bullish about a stock or two and are fairly sure that, over the next five years or so, you will earn at least 15% on them per year, on average, then you might choose to keep the loan and pay it off gradually, as you originally planned. You might take the $5,000 and invest it. If the stocks perform as expected, you’ll be earning more than you’re paying out in interest.

That’s why mortgages, for example, are not necessarily a bad thing. If your mortgage rate is low, it makes perfect sense to keep paying it off gradually. If your rate is high, consider refinancing. Mortgage interest brings with it some tax benefits, too.

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