For example, I have a .9% interest rate on my ’07 Honda Civic with a 36-month term. I will easily drive this car 9-10 years (6-7 months loan free). My current savings account rate is 3.25%

The idea that the “car loan” is a “bad debt” is pretty ridiculous.

I agree with Trent when he said the good debt and bad debt argument is determine situationally.

If you are able to borrow money to invest in something that earns more than you’re paying in interest, that is acceptable provided the risk is not too great.

You just need to be sure you are too exposed, which is why the people who are suffering from the sub-prime lending problems are in such bad shape. They took on too much risk, and aren’t able to deal with it now that the bottom fell out.

Now, if you’re talking consumer debt (credit cards, car loans, etc.) it’s absolutely true that all debt is bad. You should never go into debt to buy something you can’t afford to pay cash for. If you have no other choice, say for a car that you need to get to work, never spend a dime more than you have to. That means used and reliable, not new and exciting.

If your debt results in you making more money… like buying a home, fixing it up and reselling it for more… or a student loan that results in more money in the end after a better career. (which is not as cut and dry as it is made out to be). Then the debt can be considered “good debt”.

If it is not, and you end up paying more, then the debt is bad because…
#1. The borrower is the slave of the lender
#2. Paying more than something is worth can’t be a good thing.

Whether or not the debt is based on a want or a need is irrelevant.

Take the car note example. While it may be a GOOD DECISION to take out the car loan (because you need it), the DEBT ITSELF is not “good debt” because it will result in you paying more than the car is worth as opposed to MAKING YOU MORE MONEY.

There are only so many state schools. If future doctors in the US only went to state schools, or could afford it right from the start, the US would be facing an even greater doctor shortage than it is.

I am not happy that this is how medical school works in the US and I don’t think it’s right, but there isn’t too much that I can do about it.

For those of you saying all debt is bad – the answers are never that easy. Black and white is hard to come by, everything is usually a shade of grey.

I also have to laugh that some of you seem to suggest eternally throwing money away by renting when it is possible to purchase a home with a mortgage for roughly the same amount of $ as the rent.

You are earning interest on someone else’s money. You aren’t getting a negative real interest rate.

If you didn’t borrow the money you would have $0. By borrowing at 7% and investing at 4% you are getting a 4% return on $0 of your own money. If inflation is 8%, you can’t lose value on your $0, so you are still gaining 4% of whatever value you borrowed.

My spouse and I are each spectacularly in debt — student loans. Even though we both worked a LOT during school, had some nice scholarships, and we went mostly to state schools, I came out of my programs (JD + LLM) and he will come out of his soon (MS + PhD) with a level of educational debt that disqualifies me entirely from writing on a personal finance website, evar, except to say ZOMG, the daily, weekly, monthly interest accrual is a thing of staggering suckage.

Our degrees have been worth every penny, insofar we each did well enough to enter at or near the top of what our professions had to offer. We each did just about everything “right.”

But I have a hard time thinking of it as “good” debt. Some of it is financed at interest rates below 2%, and it’s the cheapest money we’ll ever see. None of it is at an effective rate higher than 6%. In this, we have also done just about everything “right.”

But I still can’t view it as “good” to owe that money. It affects every lifestyle, long-term decision we make. Not about big screen TVs, or cars, or lattes or other silly things we don’t need and never wanted in the first place — but where we can and can’t live, where he can and can’t teach, what clients I can and can’t work for, just to keep up with the debt service.

THAT’s not GOOD.

“You can deduct up to $2,500 in student-loan interest paid in 2007 if your income for the year was $55,000 or less if single, or $110,000 or less if married filing jointly. Single people can take a partial deduction if they earned up to $70,000 for the year, or $140,000 if married filing jointly.”

About 4 years ago, when we started to realize all of our mistakes with money over the years, we were about $50k in debt, not including our house. We decided to begin working our way out, but realized we would have to spend some additional money if we ever wanted to get ahead. We decided to stay in our current house, but it would need to be properly remodeled from a 2 bedroom home into a 3 bedroom home (previous owners tried, but there were so many problems that we found out while ripping everything out were safety hazards). We paid cash for all of the material and did the work ourselves (it still cost us about $10k), but it caused us to postpone being debt free by several years. However, we will be ahead in the long run by making this choice as the improvements we did will pay off if we ever sell, plus we don’t have a larger home loan if we had just decided to move to a larger home. Based on our remodel, neighborhood and potential future ROI if/when we sell, this was a good investment for us.
2 years ago, we went into additional debt by over $10k to gain custody of my husband’s 3 kids. Their living situation with their mother was not going to wait on us to save up that money. There is no way to put a montetary ROI on this money. However, the security and stability of the kids lives with us is priceless. There is no way I’ll ever complain about how much money we ‘lost’ to interest in our situation.

From my experience, debt is something I should have avoided a lot more. Having it means that I’m not really free to choose my destiny, rather it is controlled by student loans and the car payment (thank God we paid off all credit cards years ago). The impact of the “pay later” mentality now affects my family life in a negative way, we are working our way to a place where we will be able to live how we want to, but it’s going to take at least a year and a half to get there — maybe two years. And that’s “not bad”, compared to other stories I’ve heard.

Hindsight is, of course, 20/20, and based on that hindsight, the only possible debt that’s worth having would be school loans or a mortgage. All the other stuff (car loans, credit cards) are merely ways of receiving instant gratification. I understand that people may need to get a car loan when they get out of school to get to work — but that loan should likely be more to the tune of $5000 for a decent used car that will last 3 years (Civic, Corolla, etc) than $25,000 on a new car.

People should listen to a few Dave Ramsey podcasts, and pay special attention to the people who built up a pile of debt with “good intentions” — starting a business, getting an education, paying medical bills — to know just how quickly things can go really, really bad — and how long it is going to take them to fix the problem.

I think Kris (Comment #34) got it exactly right, these debts are tolerable, not good. Even though these debts are tolerable, I’ve kept them minimized as much as possible by paying them off early or avoiding them altogether.

This once again depends upon individual circumstances.

What you mean in six words.