What is good debt?

The word “debt” has a bad reputation, and often for good reason. But not all debt is the same. Borrowing to pay for a holiday or cover the month’s current expenses has nothing to do with borrowing to buy a commercial property that will be rented out. The distinction between good debt and bad debt, popularised in personal finance literature, is still useful for making reasonable financial decisions, especially after the high-interest-rate years experienced in the euro area between 2022 and 2024.

What is meant by good debt

Good debt is debt that finances the acquisition of an asset or service which, over time, provides economic value greater than the total cost of the loan. That value may come in the form of direct income (rent from a property, profits from a business), asset appreciation (a home that increases in value) or higher future income for the borrower (training that opens access to a higher salary).

The key lies in comparing cost and return. If the loan has an APR of 4% and the financed asset produces a 7% net return, there is a positive margin. If the loan costs 10% and the asset produces 3%, the transaction destroys value no matter how much it is labelled as an investment.

Robert Kiyosaki, who popularised the expression in Rich Dad Poor Dad, summed up the idea in a simple phrase: good debt buys assets, bad debt buys liabilities. An asset produces income; a liability generates expenses.

The difference between good debt and bad debt

The practical difference is easier to see through specific examples.

Buying a home with a mortgage to live in it has elements of both. It generates an expense (interest, maintenance), but it also means no longer paying rent and usually appreciates over the long term. Most advisers consider it “acceptable” debt if the monthly payment does not compromise the household’s solvency.

Buying the same home with a mortgage and renting it out to someone else changes the scenario. If the rent covers the payment and leaves a positive margin, the debt generates net income: it enters the territory of good debt.

Financing a €6,000 programming course that gives access to a job paying €15,000 more than the previous one is good debt, provided the labour market analysis confirms that projection.

At the other extreme, paying for a holiday with a revolving credit card (with APRs that in several European countries can exceed 15-20%) and repaying it in instalments is the classic example of bad debt. The asset (the experience) is consumed, cannot be recovered and the financial cost of the loan accumulates over months or years.

Another clear case of bad debt is buying consumer goods that lose value quickly (electronics, clothes, cars) with expensive personal loans. The good depreciates faster than the loan is repaid.

Common examples of good debt

The three most cited examples in personal finance literature are a mortgage for real estate investment, a loan for education and debt to finance a business.

1. Mortgage for real estate investment. Buying a property to rent it out is the classic example. In 2026, with Euribor stabilised at moderate levels after the 2023 highs (above 4%), investment mortgages offer more favourable conditions than in the previous two years, although with significant differences between euro area countries. A property that generates rent capable of covering the payment and leaving a positive net margin, including taxes and associated costs, produces recurring income. The main risks are lack of tenants, missed payments or a fall in the property’s value.
2. Loan for education. Student loans, especially those offered by banks with specific conditions for education, usually have lower rates than standard personal loans. If the training opens access to a job with a significantly higher salary than before, the return on investment is usually positive over a 3 to 5-year period. The key is to analyse the sector and check that there is real demand, not just a commercial promise from the school.
3. Financing for your own business. This includes credit lines for SMEs backed by public guarantees (equivalent to Spain’s ICO in each European country), bank financing for self-employed workers and participative loans. It also includes alternative financing through business angels or crowdfunding, which technically is not debt but equity, although it plays a similar role. Before considering this option, it is worth understanding the alternatives properly: angel investor profiles or deal flow fundraising processes can avoid loading the business with interest payments in its early stages. Pure debt has the advantage of not diluting ownership, but it requires repayment capacity from the first month.

Depending on the context, loans to acquire machinery or professional equipment that increase billing capacity, or financing for commercial vehicles for self-employed workers, can also be considered good debt.

When good debt becomes bad

No type of debt is intrinsically good. What makes it useful or harmful are the specific conditions of the loan, the evolution of the financed asset and the borrower’s situation.

A mortgage for a rental property becomes a burden when the home remains empty for months, tenants stop paying or the property price falls in the area. Real estate cycles exist and bubbles can take years to correct.

A loan for education stops being worthwhile when the course does not provide the promised skills, when the labour market changes between the moment of signing and the moment of completion, or when the person does not complete the programme.

A business loan becomes a problem when the project does not generate the expected income, especially if the debt includes personal guarantees that put the entrepreneur’s family assets at risk.

In addition, any good debt can become bad if financial conditions change. A variable-rate mortgage taken out in 2021 with negative Euribor went on to double or triple its monthly payment when the index rose between 2022 and 2024. Millions of households across the euro area saw an apparently manageable debt turn into monthly pressure.

Another decisive factor is the ratio between total debt and available income. The European Banking Authority (EBA), in its guidelines on loan origination and monitoring, recommends that institutions assess the borrower’s repayment capacity using prudent debt-service ratios. Exceeding the threshold of 35-40% of net income allocated to debt servicing significantly increases the risk of default if any unexpected event occurs.

How to assess whether taking on debt is worth it

Before signing any loan, even one labelled as an investment, it is worth doing the numbers.

Calculate the total cost of the loan, not just the monthly payment. The APR includes interest and fees and gives a more accurate picture than the nominal rate. On a €20,000 loan over 5 years with a 9% APR, the total interest cost can exceed €4,900.

Estimate the expected income or benefits from the financed asset or service. Be conservative: use the lowest projection within the reasonable range, not the most optimistic one.

Compare the expected return with the total cost, including taxes. Gross rent of €900 is not €900 net: there are local property taxes, community fees, insurance, maintenance, taxation on rental income and vacancy periods, depending on the tax rules of each Member State.

Simulate adverse scenarios. What happens if the asset produces no return for six months, if rates rise by 2%, if there is a personal emergency. Good debt must remain manageable in negative scenarios, not only in the base case.

Verify the legal basis of the contract. Across the European Union, Directive (EU) 2023/2225 on consumer credit applies and is being transposed into each national legal system throughout 2025 and 2026. It expands consumer protection, requires more rigorous creditworthiness assessments and specifically regulates BNPL (Buy Now, Pay Later) deferred payments. It is worth checking that the lender complies with this framework.

Separate the money allocated to debt repayment from day-to-day spending money. Isolating the monthly payment amount reduces the risk of using it by mistake. Tools such as a separate prepaid card for discretionary spending help control household cash flow without compromising committed payments. The Bitsa card, as a prepaid card without an associated bank account, works well for this use: it is topped up only with the month’s variable spending budget and avoids mixing categories.

And do not forget the basic advice that freelance professionals use to manage their income and expenses: separate accounts by purpose, maintain an emergency cushion and avoid borrowing beyond real repayment capacity, even if the asset promises an attractive return on paper.

Good debt exists, but not as an absolute category. It is a useful label for thinking more clearly before signing, not a guarantee of results. Any loan, even the best structured one, requires prior analysis, conservative scenarios and verified repayment capacity. The basic rule remains the same as twenty years ago: debt only makes sense when what it finances provides more value than it costs and when the borrower can handle it without compromising financial stability.

Frequently asked questions

Can a mortgage always be considered good debt?
No. A mortgage for a main residence is acceptable debt if the payment does not exceed approximately 30-35% of net income. A mortgage for a rental property can be good debt if the rent covers the payment and leaves a positive margin after costs and taxes. But if the property remains empty or loses value, any mortgage can become a burden.

Is paying for university studies with a loan good debt?
It depends on the expected return. If the degree opens access to a significantly higher salary than the person would have without it, and the loan has reasonable conditions, it can be considered good debt. In most European countries, student credit usually has lower rates than a standard personal loan and grace periods until the end of the studies.

Is public financing for SMEs considered good debt?
Credit lines backed by public guarantees (ICO in Spain, KfW in Germany, Bpifrance in France, SIMEST in Italy and equivalents in the rest of Europe) are financing instruments with generally favourable conditions. If they are used for productive investment that generates income greater than the cost, they fall into the category of good debt. If they are used to cover current expenses without a return plan, they do not.

What is leveraged debt?
Leverage means using debt to amplify investment capacity. Buying a €200,000 property with €40,000 of your own money and a €160,000 mortgage is leverage. It multiplies potential gains, but also losses if the asset depreciates. It is a valid technique only with rigorous risk analysis.

Is it better to borrow or wait until you save?
It depends on the cost of waiting. If the financed asset appreciates faster than you can save, borrowing under reasonable conditions may be preferable. If the asset depreciates or does not generate income, waiting and buying without debt is almost always better.