Some people hear the word debt and automatically assume it is a bad thing. However, this is not always the case. All of us will experience debt at some point in our lives and sometimes it is necessary to achieve important milestones, such as buying a home or even going to university. Read on to discover what good and bad debt is and the differences between each.
What is good debt?
- Debt you can afford to repay
- Debt you have carefully considered and researched before applying
- Debt that can better your future and help you take your next step in life
Good debt is a debt you can afford to repay and that is considered ‘necessary’ to progress. Examples of good debt include taking on a mortgage, a student loan or remortgaging to pay for an extension on your home.
Good debt is borrowing with a great deal of thought and preparation beforehand. You carefully consider your finances and how you will make repayments once you have borrowed the money. You may also research and shop around to find the best deal when it comes to interest or fees.
People take on this type of debt to help them grow and develop. It supports a positive end goal and will only be granted if you have the funds to pay it back. When applying for a mortgage, for example, you undergo a rigorous vetting process where your finances are scrutinised and you need to prove that you can make repayments. This ensures this debt is manageable and less likely to turn ‘bad’.
Short-term loans can be good debt if they are used in the right way. Emergencies happen and this type of borrowing can offer useful support as long as you have a plan in place for paying it back. Plus, looking into a provider that doesn’t charge fees and allows you to pay back what you owe early without extra charges makes this type of debt even more manageable.
What is bad debt?
- Debt you have taken on quickly, without much thought
- Debt that has an interest rate or fees that could affect your ability to repay it in the long run
- Debt that you have no clear plan for repaying
Bad debt is a type of debt that you take on without making a clear plan to pay back. It is usually money borrowed for an expense that isn’t helping you achieve new milestones in life and can be more of a hindrance than a help when trying to work towards such milestones.
Bad debt is often taken on without much thought for the future of your finances and can sometimes lead to money troubles later if you discover you cannot make repayments. If you need money fast, you may also make poor decisions and end up with a product that doesn’t work for you or doesn’t provide the best deal.
Bad debt sometimes comes with high interest rates that can become unmanageable over time — a credit product such as an unauthorised overdraft can quickly spiral out of control if you find that you cannot make repayments once charges or interest have been added on.
It’s important that when you need to borrow money you approach it with care and careful consideration. Before applying for any credit product, consider these points and ensure you’re only taking on what you can comfortably afford to repay.