How good debt could positively impact your future

Not all debt is bad, even if sometimes we talk about it that way. In fact, certain types of debt could positively impact your personal finances and your future. 

Let’s take a look at when and how debt can work in your favor. 

Student loans

Thanks to more adults going back to school, the average age of college students in the U.S. is now 27. That's several years older than it used to be, but it's still young in terms of life experience. It's easy to simply borrow every dollar you can via student loans to make life more comfortable during your school years. 

But keep in mind that borrowing less means you repay less—and pay less in interest. 

How to make sure your student loan is good debt:

1. Borrow the bare minimum. If you can get by with a part-time job and a small student loan, do so. If school cost is a factor, pick up as many credits as you can at a less-expensive community college. The less you borrow, the faster you can be free of your student loans.  

2. Keep an eye on future earning potential. Everyone should experience the joy of following their passion. But also, be practical about what degree (or degrees) you pursue. For example, if your passion and eventual degree are usually low-paying, consider a backup plan. Maybe you could earn a dual degree or minor in a higher-paying field. Let's say you earn a degree in drama. Pair it with a marketing or entertainment production degree to make yourself more marketable and increase your earning potential. 

Mortgages

A home is more than just a roof over your head. It's also one of the largest investments you'll ever make. Home values have risen 162% since 2000. Home prices aren’t guaranteed to rise, but over time, U.S. homes have enjoyed a slow and steady increase in value.

A mortgage could be good or bad. Here’s how to make sure yours is a valuable tool and not a ball and chain.

How to make sure your mortgage is good debt:

Before taking on a mortgage, do your homework. 

Check out property values in the area where you’re shopping. Learn everything you can about how much it would cost to maintain the home. Price out property taxes, insurance, and utilities.

The general rule of thumb is to keep your housing payment to 28% of your gross monthly income, but there's no rule that says it needs to be that much. Again, the less you borrow, the less you have to repay. A smaller monthly payment could also help you manage your mortgage debt more comfortably while you’re paying it off.

Home equity line of credit 

You could use a home equity line of credit (HELOC) to cover a wide variety of major expenses. One common use of HELOCs is to improve the home by renovating or tackling big maintenance projects. If your HELOC increases the value of your home, it could be a good debt.

Imagine that you own a home that was last updated in the 80s. While cosmetic issues bug you, the larger problems are structural. The front porch slopes. Huge tree roots threaten to crack the foundation. The chimney needs to be rebuilt, and there's a leak coming from somewhere in the hall bath. In short, your investment has seen better days.

How to make sure your HELOC is good debt:

Using a HELOC to make repairs and updates to your home could make it a more pleasant place to live. Bonus points if the improvements also increase the market value of the home. 

Once you start looking around the house, it’s easy to come up with a long wish list of things you’d like to do. As fun as it is to shop for the latest and greatest upgrades, stay on budget and do the highest-priority projects first.

You could also use a HELOC to consolidate higher-interest debts. The HELOC could help you:

• Save money on interest charges

• Get relief in your monthly budget

• Get rid of the debt faster

• Relieve stress by streamlining your finances

Improving your financial situation with smart borrowing strategies is good.

Personal loan  

Personal loans can be used to cover a wide variety of large expenses and purchases. You could also use a personal loan to cover a financial emergency. Most personal loans are unsecured, which means you don’t need to borrow against something valuable that you own. Generally speaking, interest rates for personal loans run lower than interest rates for credit cards. Also, you may be able to borrow more with a personal loan compared to a credit card. 

A personal loan for debt consolidation is a great example of how you could use this borrowing strategy to build a brighter financial future. Here's how it works: 

• You add up all your high-interest debt. This includes debts like credit cards and payday loans. 

• You shop for a fixed-rate personal loan with an interest rate lower than your existing debt, and apply. 

• Once your loan is approved and funded, you use the funds to pay off multiple higher-interest debts. 

• Instead of making separate payments on each of your old debts, you make a single monthly payment to the new lender.

• Because the rate is fixed instead of variable, you know exactly how much your loan payment will be and when the loan will be paid in full. 

Here’s how to make sure your personal loan is good debt:

A personal loan should improve your financial outlook or your quality of life. 

Making a debt consolidation loan work in your favor depends on two things: 

• Make all payments in full and on time.

• Avoid new debt until your consolidation loan is paid off.

If you’re using a personal loan to cover a large expense other than debt, consider the value of that expense. What you want is to still be satisfied with the loan long after you got the loan. That’s why vacation loans usually aren’t a good idea. It doesn’t feel good to still be paying for a trip several years after you took it. Covering your pet’s surgery to repair a broken leg, however, could be a no-brainer that you’ll never regret. 

Like most things in life, no debt is always good or always bad. Properly managed, some kinds of debt can have a positive impact on your future.