Evaluating Good and Bad Debt
Good versus Bad Debt
Before borrowing money, it’s worth knowing the difference between good and bad debt. Some things are worth going into debt for, others can leave you in a big financial mess. Here’s how to tell the difference.
What is good debt?
A good debt is a sensible investment in your financial future, should leave you better off in the long-term and should not have a negative impact on your overall financial position.
You will have a clear and specific reason for taking it out, and a realistic plan for paying it back that allows you to clear the debt as quickly as possible, in a series of regular and affordable payments.
Examples of good debt
> Student Loan – This is a good investment because university graduates typically get paid more than non-graduates and the interest rate is relatively low which can easily be repaid once employed and earning.
> Investing in your own business. It helps you develop your own business, as long as you have a sensible and realistic business plan. If your business does well, it will end up worth far more than the loan originally took out.
> Buying a car you can afford, if it is essential to enable you to get to work and earn a living.
Examples of bad debt
> A luxury holiday you can’t afford. A luxury holiday can be a trip of a lifetime, but is best avoided if it’s accompanied by a lifetime of debt. Best solution – save up for your dream holiday.
> A brand new car you don’t need. If you don’t need to buy a new car, then think twice! Don’t end up looking rich but end up down the drain.
>Borrowing money to pay bills and or other credit commitments. Seek free confidential advice, which will help you get your finances back on track.
Tips to avoid bad debt
When considering borrowing money, ask yourself the following questions. If any of the answers are ‘no’, that debt is likely to be bad.
Will borrowing this money improve my finances in the long run?
Have I shopped around to get the best deal?
Am I borrowing this money as cheaply as possible?
Will I be able to cope should interest rates rise in the future?
Will I comfortably be able to afford the monthly repayments?
Do I understand all the terms and conditions associated with borrowing this money?
Do I understand the risks and what could happen if things go wrong?
Considering all the pros and cons of borrowing, all you need to do now is assess your finances if it will be able to cover for your arranged payment schemes. Never jump into something that you cannot thread in the long run!