Good Debt vs. Bad Debt
Lesson 2

1. What is debt?
1. Give students time to think of different debts such as car loans, mortgages, student loans, credit cards, furniture purchase plans, etc.
2. Out of these, which would you designate as “good debt” and “bad debt” and why?
3. Car loans – considered bad debt, but can they ever be good? (0% interest rate)

1. Good car loan (0%)
1. Why is a 0% loan really good for you? (In other words, how much would you save on a car using a simple interest loan at 6%)
2. Bad debt loan (5%) – Why is a car loan considered by many to be ‘bad debt’.
1. Discuss interest and depreciation of the car.
2. Can you get a car loan at much higher percents? If so, how?
1. Yes poor credit due to late payments on loans or just having no credit can be considered risky.
2. If time allows, you can go into explaining to students the process of obtaining a ‘free credit report’ that they are entitled to each year and where to obtain one.
3. Worst car loan (15% +). People with the worst credit have what is called a credit-rebuilder rate. Many people get this after filing for bankruptcy also.
1. Have an ad of “We Finance All” car companies.
4. Discuss what students would pay for the same car as you using the website: http://mortgages.interest.com/content/calculators/simple.asp

 

1. Another alternative to buying a car could be using cash upfront for the whole car.
1. Let’s look at the savings on a $30,000 car?
1. Similar to zero interest car except if you make payments continuously to a high interest earning savings account or Mutual Fund the you will make money saving for the next car.
2. What if you are offered on a $30,000 car a ‘0% or $3,000 cash back’ offer? What should you do?
1. Option 2: Same car except 0% is only for 36 months or 2.9% for 60 months.
2. Other options can be discussed that you find in a newspaper.
3. Final Option. Leasing vs. Buying
1. What is the difference between leasing and owning a car?
1. Discuss what a lease is and the different variables in a lease such as:
1. Mileage
2. Down payment
3. Years
4. Purchase price if you want to buy at the end of the lease.
5. Nicks and Dings on the car.
6. How does this relate to renting and apartment vs. owning a house? (Equity)

2. Credit cards – considered bad debt, but can they be good for you?
1. Rewards programs – cash rebate – airline miles

1. Discuss the various reward programs that are available.
1. If students bring in their credit card agreements then we can look at the different options
2. Must pay balance in full for reward cards!!

2. Bad Debt scenario

1. APR and how it compares to savings account rates, etc.
2. Annual fees?
3. Late fees? (and implications as discussed from car loan lesson)
4. Minimum payment (Have students give you a balance – how is it calculated; how long until paid off; amortization schedule) go to  web site: http://www.octfu.org/calculators/java/payoffcc.html

1. Ask students for a common balance for college students and discuss what a student would actually pay for this balance if only minimum payments are made.
2. Have students answer the following:
1. How long will it take to pay off a $3,000 balance if you pay $30 a month on an account that earns 17%?
2. How long will it take to pay off the same balance if you make a double minimum payment?
3. In both situations, what is the final cost that you paid the credit card company for the $3,000?
4. More questions can be given for the students to take home and research on the web.

3. Is there really any good debt?
1. Mortgages for owning a home can be considered good debt due to the following reasons:

1. Appreciation vs depreciation
2. Tax benefits
3. Investment vs. renting benefits (relate to leasing vs. buying a car)

2. Student Loans can be considered good debt if…

1. Only if you get a job worthy of the loan at the end
2. Normally payments are small and can be spread over many years with low interest rates.
1. Catch – If you ever file bankruptcy, student loans can’t be written off. Government will garnish wages.

4. Discussion of Other Debt like furniture store promotions, etc. can take place here.

---

Main    Course Description    Student Lesson 1    Student Lesson 2    Student Lesson 3