Hello again! Cate here, talking, as usual, about debt.

The point of my series here at Queercents is to talk about the dangers of getting into debt. But when I strenuously suggest avoiding debt, I’m not talking about all debt. Good Debt and Bad Debt are polar opposites and mortal enemies.

Bad Debt can make you miserable and have wide-reaching negative consequences in your life. Good Debt can enable you to buy a house, or go to school, or own a car. And if it’s properly managed, Good Debt is a healthy part of your financial life.

Good Debt generally results from your conscious decision to borrow money for a big ticket item that will produce concrete benefits to your life. The bad kind of credit card debt that I’ve talked about often result from the opposite–an unconscious trickle of spending on small items that produces no obvious benefit. I’ve had both kinds:

Bad Debt: $5,000 credit card debt from living beyond my means, accumulated slowly over time due to my lack of consciousness and foresight about money.

Good Debt: $10,000 car loan at a low interest rate, cautiously decided upon, to enable me to get around.

If you find the idea of Big Loans daunting … good! It means you’re paying attention–owing that much money is a scary thought. I was in a near-panic when I signed a piece of paper agreeing to pay someone back $10,000 for a car! People who get into Big Loans thoughtlessly are not getting into good debt.

Just because it’s scary, doesn’t mean we shouldn’t do it, however. There’s a ton of good resources to help you decide when and how to get into good debt. (Check out Queercents on student loans and mortgages!) To get you started, here are three basic planning guidelines to think about:

  1. Shop Around. This seems like a bit of a no-brainer. Look before you leap is always a good rule to follow in personal finance. In the case of taking on a Big Loan, it behooves you to look at all available sources of financing. With car loans, for example don’t just depend on the car dealership, ask around at banks. I got my auto loan from Capitol One and walked into the dealership with a loan ready to go–it saved me hundreds of dollars in interest charges.
  2. Take a Hard Look at Your Financial Situation. Think carefully about how you are going to be able to afford the loan payments. Look at your budget or spending plan and figure out where those dollars are going to come from. What are you going to have to give up? Don’t forget to account for associated costs. When buying a car/education/house, you’ll have to pay for gasoline/books/home repair, etc. as well, and this can end up being a good chunk of the cost. Factor the total cost of ownership into your financial assessment.
  3. Have a Concrete Re-Payment Plan. Please, please, please never accept a loan without a concrete idea of how you’re going to pay it back. Credit cards actively discourage this kind of thinking, which is one of my biggest problems with them. Never tell yourself “oh, I’ll pay it off someday” or “I’m sure to get a raise eventually.” Down that road lies bad, very bad debt.

Before you accept a loan, make an outline of how it’s going to get paid back. Write down your payments and any early payments you’re planning. Even if this plan changes over time, just having it set down in a plan will help you make wiser financial choices over time.

My own experience with Good Debt was instructive. I always made my car loan payment on time, but when I decided to sell my car while still paying it off, I discovered I had negative equity–I owed more than the car was worth. I also discovered how hard the bank made it to make extra payments to the principle. The bank is in the business of prolonging your loan, not helping you pay it back early!

Have you had a good or bad experience with a Big Loan? I’d love to hear about it in the comments.

Photo credit: stock.xchng.