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Is There Such a Thing as Good Debt?


debt quickIt’s a four-letter word that can send chills down consumers’ spines and place them under extreme duress: debt.

Debt is generally regarded as a negative thing when it comes to a person’s overall financial health and common wisdom suggests that a person can only achieve financial independence once he or she eliminates all debt from their balance sheet.

“The reality is that there are varying degrees of debt. Some types of debt are good and some are bad,” said James C. Kelly, Wealth Strategist at PNC Wealth Management®. “Don’t just dismiss all forms of debt as an evil thing that you should avoid at all costs.”

When it comes to achieving your financial goals, debt can actually be a useful tool – provided you use it carefully and intentionally by understanding the interest rates and other terms, Kelly explained.

Here are certain types of debt that may be beneficial over the long term:

1. Mortgages

The average person can’t afford to pay cash for a home – and that’s when you typically need a mortgage loan. We are still in a relatively low interest rate environment, so while you will pay interest on your loan, the upside is the house has the potential to appreciate in value over time. There are other benefits to having a mortgage, including being able to deduct the mortgage interest when filing a tax return.

“Not only is real estate an investment in itself, but you need a place to live,” Kelly said. “In many circumstances, it’s a more financially sound decision to buy instead of rent.”

He noted that would-be home buyers should understand the type of mortgage they choose, such as adjustable rate mortgages and fixed term mortgages. In addition, there are many beneficial mortgage programs available through the federal, state, or local governments that can provide additional assistance, such as those for military members.

2. Certain Types of Student Loans

Not all student loans are created equal.

“Oftentimes, students and their parents don’t understand the different types of student loans – and that can cost them dearly in the end,” Kelly explained. “However, when used appropriately, student loans can help unlock career opportunities that are only available to college graduates.”

Graduate PLUS Loans, for example, typically have a much higher interest rate than Stafford Secured Loans. In addition parents should seek out grants made available through the school, state, or private agencies that may help defer costs.

That being said, Kelly advocated that parents begin saving for their children’s college expenses as early as possible by opening up a 529 plan or another type of savings vehicle.

“The more you save, the less you or your children will have to take out in student loans,” he added.

3. Low Interest Rate Loans

Sometimes bills or unexpected expenses can pile up. In those cases, you could be subjected to high interest rates through credit cards or “pay day” loans, perpetuating your financial misery. One solution to these situations is to find a low interest rate loan.

“If you’re paying interest on top of interest, you’re going to find yourself in a seemingly never-ending cycle of trying to chase debt,” Kelly said. “You can shop around to find a bank that will offer you lower interest line of credit, or can ask a family member for a low interest rate loan.”

For most people, taking on debt is inevitable. Just remember to be smart about your debt and never live beyond your means.

“Ask yourself: How will this help me achieve my future financial goals?” Kelly suggested. “If you’re unsure of whether the debt will help or hinder your objectives, seek out the advice of a financial advisor.”

James C. Kelly is a Wealth Strategist with PNC Wealth Management.

About 22 percent of American families have education-related debt or loans. – James Kelly