Category: Debt

Debt

Is Good Debt Always Okay?

Debt is often split into good and bad debt. How these are actually defined can differ which means that it is not always easy to know whether good debt is always a good thing. Some would say that good debt is a debt that you have thought carefully about. You have weighed up the risks, made sure that you are confident that you can pay it off and compared lenders to make sure that you are getting the best deal. However, others go further and say that not only should the above be done but also the debt should be good value for money. An example would be a mortgage which leads to you having a home worth more than the amount you paid for it plus the cost of the debt or a student loan if it ends up with you getting a job that earns you significantly more or a car loan if you need the car to go to work and earn money.

All debt needs to be treated with caution though. You should not just borrow money as soon as you need some more without thinking hard about it. Even if you are borrowing to buy a house and you are confident you will be able to pay it back, you need to consider the consequences. Every month that you have to make a repayment you will have less money to spend on other things. You may be able to manage that at the moment, but after five years or ten years or longer your situation may change and that repayment may just be too much. A mortgage repayment does tend to be lower than rent though, so it can make financial sense, but just make sure that you do not end up borrowing more than you can afford. This means that you should find a home of a suitable price for your budget which means that location and size will be really important and you may have to compromise to get something that you can afford.

Some people fear all debt. This can hold them back as good debt can be really useful. If you borrow money to buy a home, get an education or expend a business, you could find that in the long run you will be much better off financially as you will find that the borrowed money will act as an investment and you could get a lot more back than you paid for the loan. It would be a shame to not take the opportunity of doing these things if you could not afford it without going into debt. Obviously being cautious is good. You need to think through the decision and make sure that it is right for you. Make sure that you will be able to make the repayments and that whatever you are spending the money on with be worthwhile. Consider perhaps whether doing a psychology course is worthwhile compared to a course in journalism, one of which can lead to a career and the other may need further qualifications in order to lead to a good career. The same as when buying a home, you need to consider whether it is a property that will gain in value, whether it is in good condition or if you have to invest more money in it and whether the location is a place which is likely to increase in value.

It can be wise to discuss this with someone else. It can be difficult not to get emotional when you are planning a future project such as buying a home so logically talking to someone who is not emotional could help to clarify your thoughts and apply more straight thinking. A financial advisor could be a lot of help as well, as they will be able to let you know which sort of loan would be the most suitable and which of those is the cheapest. Although you will have to pay them, they should save you money in the long term if they make good recommendations.

Some people are not good at budgeting and not good with money. This means that if they have any sort of debt they struggle with the repayments because they do not leave themselves enough money to be able to afford them. If you are like this then it could be wise not to get any debt at all. You could end up getting yourself into a lot of trouble if you do. You will know if you are this type of person, perhaps because you spend any money you have really quickly or because you have been in trouble with debt before. You may find that your credit record is not good anyway and so you will not be able to borrow any money anyway. However, you may still be given the opportunity to borrow so make sure that you do not take it. If you feel that it will be unwise for you to do so.