The average American household debt has risen to a record level, and the number may surprise you.

Debt plays a significant role in our financial lives. While it can be a valuable tool for financing investments and purchases, not all debt is created equal. Understanding the difference between good debt and bad debt is crucial for making informed decisions about how to manage your finances.

Good Debt

Good debt is a loan used to purchase something that has the potential to appreciate in value or generate income over time. This type of debt is considered favorable as it can help build wealth and improve financial stability.

  1. Mortgages: A mortgage is a type of loan used to purchase a home. It is considered good debt because a home is an asset that can appreciate in value over time. Additionally, a mortgage allows you to build equity in a home, which can be used as collateral for other loans in the future.
  2. Small Business Loans: Small business loans are considered good debt because they are used to invest in a business, which can lead to growth and increased income.
  3. Personal Loans: Personal loans can be considered good debt if they are used to make a necessary purchase or investment, such as home improvements or to start a business.

Bad Debt

Bad debt, on the other hand, is a loan used to finance purchases that do not have the potential to appreciate in value or generate income. These types of loans often have high interest rates, making it more difficult to pay off the debt, and they do not generate income or appreciate in value, making it less likely that the debt will be paid off in full.

  1. Credit Card Debt: Credit card debt is considered bad debt because it is typically used for consumer purchases, which are not investments that will appreciate in value. Additionally, credit card interest rates are typically high, making it difficult to pay off the debt.
  2. Payday Loans: Payday loans are considered bad debt because they have extremely high interest rates and can trap individuals in a cycle of debt.
  3. Rent-to-Own: Rent-to-own agreements are considered bad debt because they often have high interest rates and can result in the consumer paying much more than the item is worth.

It’s important to consider the loan terms when determining whether a loan is good or bad debt. Good debt usually has favorable loan terms, such as low interest rates, which make it easier to pay off the debt and potentially save money in the long run. On the other hand, bad debt often has unfavorable loan terms, such as high interest rates and short repayment periods, making it difficult to pay off the debt and potentially leading to a cycle of debt.

Average American Household Debt

According to a recent survey, the average American household has approximately $38,000 in non-mortgage debt, which includes credit card debt, auto loans, student loans, and other forms of consumer debt. This figure has been steadily increasing over the past few decades and highlights the importance of individuals taking control of their debts and making informed decisions about how to manage and pay off their debts.

Presented by the Financial Planning Committee of Lake Street, an SEC Registered Investment Adviser
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