What is the difference between good debt and bad debt?
Debt is a financial tool that allows a person to use their future income to pay for something today.
The difference between "good" and "bad" debt depends entirely on what the borrowed money buys. Good debt buys assets that grow in value or generate an income, while bad debt buys things that lose value or get used up quickly.
The fundamental cost of borrowing
Whenever money is borrowed, the lender charges a fee for the service. This fee is called interest.
Because of interest, the final amount paid back is always higher than the original price tag of the item. Whether that extra cost is worth it depends on what happens to the value of the item over time.
What makes debt "good"
Debt is generally considered "good" when the loan is used to acquire an asset that increases in value, or an asset that increases a person's ability to earn an income.
Because these assets usually hold their value, lenders view them as lower risk. As a result, good debt usually involves secured credit and comes with a lower interest rate.
- Home loans: Property generally appreciates over time. The house often grows in value by more than the total cost of the loan.
- Student loans: Education and skills training typically lead to a higher salary, making the initial debt a profitable long-term investment.
- Business loans: Borrowing money to buy equipment or stock that generates a profit for a business.
What makes debt "bad"
Debt is usually considered "bad" when the borrowed money buys things that lose their value quickly, a process called depreciation.
If the item is eaten, worn, or used up while the debt is still being paid off, it falls into this category. Because the lender cannot repossess a holiday or a meal to get their money back, this type of borrowing is called unsecured credit. To make up for the higher risk, banks and stores charge much higher interest rates.
- Clothing store accounts
- Credit cards used for everyday living expenses or holidays
- Payday loans and short-term cash advances
Interest limits under the law
In South Africa, the National Credit Act sets strict rules on how much interest lenders can charge. The legal maximum depends on the type of debt.
For secured loans like home bonds, the maximum interest rate is capped at a lower level. For unsecured credit, such as personal loans and store cards, lenders are legally allowed to charge substantially higher rates. This legal structure is why carrying bad debt is significantly more expensive than carrying good debt.
The grey area: buying a car
Vehicle finance often sits in the middle. Cars are depreciating assets — they lose a significant portion of their value the moment they leave the dealership floor, and they continue to drop in value every year.
Mathematically, borrowing money to buy something that drops in value behaves like bad debt. However, in South Africa, a reliable car is often essential for getting to work and earning an income. While the car itself loses value, the ability to commute makes the debt a necessary utility for many households rather than a purely bad financial decision.
How bad debt impacts wealth
Borrowing money for depreciating assets takes away from future income. Every Rand spent on high-interest repayments is a Rand that cannot be saved or invested.
Just as compounding builds wealth when money is invested, it destroys wealth when money is borrowed at high interest rates. The debt grows faster than the value of the items purchased, leaving the borrower with less money available for their future needs.
Terms used on this page
- secured credit
- A loan backed by an asset, such as a house or car, which the lender can legally take back and sell if the borrower stops making payments.
- depreciation
- The process of an asset losing its monetary value over time due to wear and tear, age, or becoming outdated.
- unsecured credit
- A loan that is not backed by any physical asset, meaning the lender takes on more risk and typically charges a much higher interest rate.
- National Credit Act (NCA)
- The South African law that governs the credit industry, designed to protect consumers from unfair lending practices and reckless borrowing.
- compounding
- Growth on growth: returns earn their own returns. It is why time in the market matters more than the size of any single deposit.
Sources
Reviewed July 2026