In a world of dichotomies, it seems almost commonsensical that good and bad debt would be pitted against one another. For those that are savvy with their cash, they will be all too aware of the perils of bad debt. For others, they don’t think that there is a distinction between good and bad debt. Some, of course, believe that debt is debt and sometimes you just need to borrow.
But as with all things in life, there is a difference between good and bad debt. What is more, it is down to you to make an informed decision on your finances. Some things require you to take out a loan. Others are just not worth the hassle.
There are ways that you can tell the difference and make the right financial choices for you.
Distinguishing Good Debt
When it comes to matters of lending, it’s always a wise option to be in the know. After all, some debt is essential and cannot be avoided. There are some debts that are considered as good debts. These can be a savvy and sensible option for those that are keen to invest their cash and see a return on investment. Of course, you should always seek to invest in something that you know is going to make a profit. What is more, this kind of debt should always serve to leave you in a better financial position.
So, what is this kind of debt?
Typically, when you are seeking out a good loan, you will always have a rational and specific reason for taking out this kind of credit. Usually, good debt will have a clear payment goal and strategy. This means that you will be fully aware of the term time to pay the date and you will have a good idea in mind of how much interest will be paid. This is an informed, financial decision. Furthermore, you will be able to afford the payments without any further repercussions.
This kind of debt will often have a cheaper rate of interest, as you will have done your research. Good debt, or a good loan, is effectively referring to a sensible option. You will make positive steps to pay this back and you will have sought out the best possible deal.
What is an Instance of Good Debt and Lending?
Some debt can serve you good stead and leave you in a great financial position in the long term.
Let’s face it, who can afford to spend over £150,000 and some, on a house upfront? No one. So, how do you pay for property? Via a bank loan of course. A mortgage, in short, is a personal bank loan that is entrusted to you based on your own personal circumstances. For many, this is a savvy investment as they will see a return on investment at the end of the mortgage term.
Should you have a savvy and realistic business plan, there is no reason why lending money to set up a business is not a sensible route to take. After all, this is an investment in your future.
Student loans can serve a positive purpose. For those that are keen to establish a good academic career before heading into the world of work, a student loan is the only way to fund this. These come with very low rates of interest. What is more, they are only paid back when you earn above a certain pay threshold. Of course, student loans can run into thousands of pounds. But, they are paid back at an affordable rate.
Opting to take a loan for a car is a sensible solution. Of course, you don’t have to go for a brand new car with zero miles on the clock. But, taking out a small loan so that you can drive a reasonable car is imperative. After all, you need to get to work and a car is the obvious solution.
The Good, the Bad and the Ugly: The Skinny on Bad Debt
So, now we have looked at what good debts are, it’s time to look at bad debts. Determining a bad debt can help you avoid this kind of debt in the future. If you find that you are already in ‘bad debt’ you can look at ways to manage your debt and get back on track with your finances.
A bad debt can be defined as the opposite of a good debt. It can be unsustainable, unaffordable and offer nothing to you in regards to investment. These types of debts can be unmanageable and are often charged with high rates of interest with no clear aim in sight for paying them off.
If you have credit cards, loans and other credit agreements in place that you cannot afford, it may be worthwhile looking at ways to consolidate credit cards. This will help you manage the monthly repayments in a more affordable and succinct way. What is more, you can have a greater degree of flexibility with your financial affairs.
Determining Bad Debt: Examples
If you are borrowing money to pay your bills or to afford nights out, this is a sure sign that you are not in the best financial place. Borrowing money to pay for other credit agreements is generally frowned upon unless you are consolidating your debts using a consolidation loan.
An example of a bad debt could be borrowing money for a holiday or for a fancy new car. These are deemed as luxuries, not essentials. They serve no purpose and you will not see a return on investment. Where possible, avoid this kind of debt like the plague. Only pay for these items with cash.
Knowing When to Borrow Money
Establishing your financial position is important. But, you also need to know that not all debt is scary. In the case of good debt, you can be in a sound financial place. But, you should always make sure that you are in a good position to pay money back when you are seeking out loans. After all, debt should be sustainable and manageable. It should never be your worst nightmare comes true.