Good Debt Explained: How Smart Borrowing Builds Wealth
Not all debt is bad. In fact, some types of borrowing can be powerful tools to build wealth, boost your income, or achieve long-term goals. The key is knowing when debt helps you move forward — and when it holds you back.
This guide breaks down what counts as good debt, how to tell it apart from bad debt, and how to use it wisely.
What Is “Good Debt”?
Good debt is money you borrow to buy or invest in something that grows in value or improves your future financial position. It’s debt with a purpose — one that strengthens your finances instead of draining them.
Common examples in the UK include:
Mortgages – Buying a property gives you an asset that can increase in value over time.
Student loans – Education often leads to better job opportunities and higher earnings.
Business loans – Borrowing to start or grow a business can generate long-term income.
Professional development loans – Funding career training or qualifications can boost your employability and salary potential.
Good debt is usually affordable, low-interest, and tied to a clear goal that benefits your future self.
Good Debt vs Bad Debt
It’s not just what you borrow for — it’s why and how.
Good debt helps you grow your wealth or earning power. Bad debt, on the other hand, funds short-term wants and can leave you worse off.
For example:
A mortgage at around 4.5–6% interest can help you buy a home that appreciates over time.
A student loan charges interest linked to inflation (RPI + up to 3%) but is only repaid when your income passes a threshold — it adjusts to what you can afford.
A business loan might have interest around 6–10%, but if it leads to sustainable income growth, it can easily pay for itself.
Compare that to credit card debt, where rates typically range between 24–35% APR, or payday loans, which can soar into the hundreds or even thousands of percent. These high-interest debts don’t build long-term value — they simply make your money more expensive to use.
So, good debt increases your future financial potential, while bad debt eats into it.
When Good Debt Becomes Risky
Even good debt can turn into a problem if it’s not handled properly.
Here’s when that can happen:
You borrow more than you can comfortably repay, even on low interest.
You rely on future growth or income that isn’t guaranteed.
You ignore total borrowing costs, including fees, insurance, or maintenance.
You miss repayments, damaging your credit score and increasing interest charges.
A common example is taking on a mortgage at the edge of affordability. A small rise in interest rates or an unexpected expense can suddenly make repayments unmanageable.
The golden rule: good debt only stays good when it’s within your means and backed by a solid plan.
How to Manage Good Debt Wisely
If you’re taking on debt for the right reasons, here’s how to keep it working in your favour:
Borrow for a clear purpose.
Take on debt only when it supports your goals — buying an appreciating asset, investing in your education, or improving your income.
Shop around for the best rate.
Use comparison tools like MoneySavingExpert, MoneySuperMarket, or Compare the Market to find lower rates and fair terms. Even a 1% difference can save you thousands over time.
Choose the right repayment term.
A longer loan term means smaller monthly payments but more interest overall. A shorter term saves money in the long run — if you can afford the higher payments.
Overpay when possible.
Paying a little extra each month on your mortgage or loan can dramatically cut interest costs and reduce the loan term.
Maintain a healthy credit score.
Paying on time and keeping debt levels manageable can help you qualify for lower rates in future. You can check your credit report for free through Experian, Equifax, or TransUnion.
Avoid using high-interest debt to repay low-interest loans.
For example, don’t use a credit card to make mortgage or student loan payments — that instantly turns good debt into bad.
Real-Life Examples of Good Debt
Buying a Home
Let’s say you buy a £250,000 flat with a £200,000 mortgage at 5% interest. Over time, you build equity by paying down the loan, and the property could rise in value. Even if prices increase modestly, your total wealth grows because you’ve used leverage sensibly.
Investing in Education
Imagine taking out a £10,000 student or career development loan at 6% interest. If that qualification helps you earn £5,000 more per year, the loan quickly pays for itself — and the higher income continues long after it’s repaid.
These are cases where debt is an investment, not a burden.
The Bottom Line
Good debt isn’t about avoiding borrowing — it’s about borrowing smart. When used strategically, it can open doors that savings alone might not.
A mortgage, student loan, or business loan can all be forms of good debt — as long as they’re affordable, purposeful, and planned. Always compare interest rates, understand the full cost, and make sure repayment fits comfortably within your budget.
Handled wisely, good debt helps you build assets, grow your income, and move closer to long-term financial freedom.
