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Debt can be beneficial when it funds investments that generate income. For instance, borrowing to purchase rental properties can be a smart move if the rental income exceeds the debt obligations. In contrast, borrowing for luxury items—like cars, jewelry, or vacations—typically results in bad debt that contributes little to net worth.
Types of Debt Explained
Understanding the various types of debt instruments can provide clarity on when to borrow and when to avoid it.
Mortgages
Mortgages are a common form of debt where banks lend money to purchase property, typically requiring a down payment. The average American mortgage debt hovers around $174,000, and failure to pay can result in foreclosure.