Good Debt and Bad Debt – What’s The Difference?

Good Debt and Bad Debt - What's The Difference?

Understanding the different types of debt can help you make the right decisions. 

Debt is an essential part of life. Without access to debt there are many experiences and assets that many of us wouldn’t be able to have, from higher education through to buying a family home. However, not all debt is the right decision. And sometimes debt can end up getting you into trouble – the wrong kind of debt can negatively affect you credit score and make it difficult to borrow at a reasonable rate of interest or even at all. People in this situation may need a bad credit loan in order to borrow or loans with no credit check. So, how do you work out whether the debt that you’re looking at is “good” or “bad”?

What is a “bad” debt?

It’s not the debt itself that causes a problem but the reasons that you’re borrowing the money, as well as the way that you’re borrowing it. Examples of a bad debt might include:

Taking out a loan for a luxury holiday. If you can’t afford the holiday without the loan then it might be better to wait until you’ve saved up.

Debt to buy anything brand new that you don’t really need. Racking up debts to increase what you own when there’s no real need is never a good idea.

Borrowing to pay off other debts. If you’re struggling to make existing debt payments it’s better to talk to your creditors than to increase what you owe.

A debt is a bad debt if:

  • You’re using it to buy something you don’t need
  • The debt is expensive
  • There are hidden or escalating costs
  • You don’t know how you’re going to repay it
  • The repayments are not affordable/will leave you without money to live on

What is “good” debt?

The short answer is that good debt will have a positive overall impact on your long-term financial position. It’s a debt that is effectively an investment in your life, in helping you get to the next stage or creating opportunities in the years to come. Examples of good debt include:

Student finance. If you’re able to study and get qualifications then you can improve your chances of getting a better job and being paid more.

Property finance. A mortgage might be the only opportunity that you have to buy your own property. If you own your own property then you can build up equity, you have security and you won’t be wasting money on rent.

Car finance. The cost of owning a car can be prohibitive but car finance makes this more affordable. With a car you might be able to take that new job, you can avoid expensive public transport and do more with your life.

Business finance. Good debt could be the difference between getting a business off the ground or never seeing it happen. The up front investment costs for a business can be high and few of us have the capital to meet these without a little help.

A debt is a good debt if it is:

  • Part of a long-term plan
  • The cheapest way to borrow
  • Offering an opportunity or advantage you wouldn’t otherwise have
  • Affordable
  • Easy to factor in to your finances when it comes to repayment

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