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Pay Off Your Debts
Authored by: FrankW on Monday, December 20 2004 @ 08:36 PM EST

I find the concept of "good debt" and "bad debt" a bit extreme. Instead I think
people should think in terms of "efficient debt", and that they approach debt
with an eye towards why they are going into debt.

So as you point out consumer debt (especially credit cards) is usually must less
efficient debt than a bank loan. This is fair, and clearly it is very inefficient to carry
any amount of credit card debt for an extended period of time. Anyone with a
respectible credit history can normally get an unsecured line of credit with a bank
at a much better interest rate.

Even better if you have a decent amount of equity in your home is to get a secured
line of credit (against the equity in your house). This can cost a bit of money (a
few hundred dollars for the property review, and registering a lien) but can give
you a very cost-efficient means of borrowing when needed.

You seem to suggest that borrowing for "consumption" is wrong. In general I
would agree with this, though there can be exceptions. I would encourage
people to consider whether they can practically afford something they want to
buy now, but have to borrow for. It might make sense if you are borrowing now
because you are confident you will have a windfall of income, or a substantial raise
in the future. Or if you are borrowing to purchasing something that will save you
money over it's life. But borrowing just to have "nice stuff" now with no clear
plan on how it will be all paid back seems dangerous to me.

In my own case, my wife recently decided to go back to school for 4 years. We
were faced with supporting our family with just my income where we had been
doing so with two incomes. Given the substantial reduction in income, we took
some steps to reduce expenses. But also, because I could forsee a resumption of
incoming in 4 years, we got a line of credit against our home so that when we
needed it we could borrow efficiently with a reasonable expectation of paying it
off once my wife was back working.

Keep up the good work on the site!

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