Debt is often considered taboo and living with debt is typically considered to be a band thing by many.
When we think of debt we think of bills hidden under the bed, late nights filled with stress and staring at your bank account wondering where you went wrong.
However, debt isn’t all bad. There are some types of debt that can be heralded good as they are considered beneficial for you in the long-run and will help you to reach financial goals. As such, it is always important when taking on debt to consider whether it will aid you or hinder you.
The type of debt you take on, added in with the debts capacity and additional costs you will incur, can often be the difference between having good debt or bad debt. For example, taking out a credit card can seem like a great idea at the time – something you can use to fund larger expenses or in an emergency – but it can be very easy for your credit card use to spiral out of control, turning it from a good idea into a disastrous one.
So, if you struggle to separate good debt from bad debt – fear not. We’re shining a light on the difference between the two, offering advice to help you manage each one and show how sometimes even good debts can turn bad.
There are some types of debt that can be heralded good as they are considered beneficial for you in the long-run
Good debt is often defined at debts that you use to make practical investments with low-interest rates that don’t affect your longstanding financial status and increase your net worth. These kinds of debt are the ones that help you reach your financial goals and can give your life long-term benefits.
Examples of good debts include:
- Business debt
- Governmental/private student loans
- Car loans
These debts allow you to invest in your future and can give you opportunities to better your life as a result.
Getting a mortgage is a major factor in becoming a homeowner, but it is important not to take on a mortgage that is outwith your means. A mortgage is one of the best debts you can take on because it allows you to gain an asset. Homes also increase in value over time, meaning that further down the line, if you choose to sell the property, you may be able to turn a profit.
Running your own business can be mammoth task on its own but investing in your organisation can help it to grow. The more growth a company has, the more money it can make to cover these debts. Much like a mortgage if your business increases in value over time you’ll find those investments pay for themselves and you can turn quite a substantial profit. Business debts can also help you maintain a hearty cashflow.
However, it is always important to borrow sensibly as defaulting on your business debts can damage your business reputation.
Student loans – governmental or private
Student loans are almost a no-brainer. Your higher education allows you to better your future and getting your degree stereotypically boosts the likelihood of getting a high earning job once you graduate. Higher earnings also open up opportunities for you to invest in things that will increase your net worth in the long-run.
Although it is hard, with university fees rising continuously, always try to cap your student borrowing so that once you are in employment you are able to pay this back comfortably.
Having a car is often a necessity for your everyday life. A car allows you to get to work, which increases your employability rate. Your car is also considered an asset, which again helps to increase your net worth. However, it is always advisable to pay as much as you can upfront to keep the interest rate low on your payments.
Bad debts are the debts that weigh you down. They come with high interest rates, are used for short-term fixes and have no long-term benefits. Not all debts start off bad, sometimes your good debts can spiral out of control and end up becoming bad debts that you wish you hadn’t taken out in the first place.
Examples of bad debts are:
- Credit cards
- Personal loans
- Payday or pawnshop loans
Bad debts often have no reasonable payment plans and frequently become unaffordable. They are commonly are a result of impulse purchases or poor budgeting.
Credit cards are well known for having very high interest rates. Even if you make minimum payments the rates can sometimes almost triple, making it almost impossible to ever pay off the bill. Many will also often use credit cards to help with daily expenses or in emergencies which is a common reason for the debt to take a downward spiral – this is also a sign of financial vulnerability.
These are often used for one-off/non-compulsory purchases such a dream vacation or luxury items. These can be good if you have a definitive goal that you want to achieve. However, this can become addictive and the upkeep can become expensive.
Payday or pawnshop loans
Payday loans are one of the worst debts you can take out. They come with extremely high interest rates – as high as 300% – and are often used either to cover an emergency or when you’re short of cash. You are expected to pay this type of debt back either immediately in a very short space of time and the interest rates mean you can often end up paying back more than double what you owe.
Pawnshop loans are normally taken out as a last resort, taking something you own – which can be anything from jewelry to a TV – and getting a loan to the tune of its value. This kind of debt is considered bad because if you do not pay back the loan in time the shop has the right to take the item you pawned and sell it in order to get their money back.
If you are struggling with debt, good or bad, we are here to help. Call us today and speak to one of our expert advisors who will work with you to find the solution best suited to your circumstances.