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Is debt good or bad? Short answer... depends. It depends on how it is to be used.

If the debt is used to invest in something with a larger return than the debt interest, then it is good. Businesses typically finance their capital investments through loans or bonds (the other way is through issuing stocks). They do this believing that they would be able to get better returns from the loans.
Buying a house is another example. Generally, the return on buying a house will be larger than the net interest paid on it.

Another beneficial use of debt is to manage cash flow. An American Express card is an example of this, though this is a special loan since it's an interest-free loan. With the AmEx card, the entire loan is to be entirely paid off within a month.

When is debt bad? When the interest on the loan is greater than the return. This happens when you spend so much on your credit cards that all you can afford to do is make the minimum monthly payments and get charged the 21% interest.

Debt is at it's worst when there's no expectation of ever paying off the debt. An example is someone maxing out his credit cards to buy stuff and hopes to die before having to file for bankruptcy. Or an even better example is all the politicians in government spending more than the government collects in taxes and hopes to leave office before the government goes insolvent.

Posted: 2002-04-15 09:51:30

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