Debt: The Good, The Bad and The Ugly

It’s never ideal having to owe someone else money, but sometimes it can be necessary. In fact, getting into debt could be the most sensible financial decision in some cases. Of course, there are also times when getting into debt is a terrible decision. On top of costing you extra money, this bad debt could lead to damaged relationships and little reward. Then there are the grey areas of debt. This is when borrowing money could have good or bad consequences depending on the situation. Knowing the difference between good and bad debt can help you to get the best out of your money in the long run. Here is a brief guide to the good, the bad and the ugly side of debt.

The Good
Good debt is any kind of debt that could help you to earn money in the future. Such debts could be necessary for investments that are otherwise too expensive to save up for. Here are just a few common examples of good debt. 

Student debt
Most people can’t afford to take a university degree without a student loan. This can often be a good form of debt – it could be essential for gaining access to higher paid jobs. Student loans also don’t have the same drawbacks as other forms of loan. They don’t affect your credit score, you don’t have to pay them back until you earn over a certain amount of money and they usually get wiped after 30 years. Even if you’re unlucky enough to never get a high-paying job, you won’t have to pay back your student debts, so it won’t be a loss.

In this day and age, it’s practically impossible to buy a home without a mortgage. There are lots of advantages to owning a home – you’ll save money in the long run compared to renting, you can add value to your property through improvements and you have the option of selling your property for a profit. This makes a mortgage a good form of debt. Of course, you can make the wrong decision and buy a property that loses value and costs you huge amounts in repairs, but by and large most people make a return from buying property. Make sure to always shop around for mortgages to get the best deal.

Business loans
It’s possible to start a business without taking out a loan (you can use savings or seek out investment through crowdfunding), however a loan can be one of the most straightforward methods. A business loan could allow you to start a profitable business and make lots of money, which is why it can be a good debt to have. It’s not so good if your business fails, however considering that most people start a business with the intention of making money, it’s a healthy risk to take. Always shop around for business loans in order to get the best deal.

The Bad
Bad debt is any kind of debt that you seek to make no financial return from. This is the type of debt that you should always aim to avoid. A few examples of bad debt include:

When you fall behind on bill payments or rent, this is known as arrears. This debt is almost always the result of poor budgeting. Getting into arrears rarely ever has any positives. It can negatively affect your credit score, plus you may be charged late payment fees. It also damages relationships with creditors – a landlord may be less willing to help you out in the future if you keep falling behind on payments. Sometimes life’s emergencies can get in the way, in which case you should always warn creditors that you won’t be able to make payments. Many creditors will be sympathetic if you tell them in advance and may be less likely to charge extra fees.

Loans for clothes, holidays and other luxuries
Luxuries such as clothes and holidays are things that you should save up money for. This way, you feel as if you’ve truly earnt and deserved them. When you buy such luxuries with a loan, you end up having to pay for them after. Instead of looking back fondly on your holiday, you may end up regretting it after knowing that it’s eating away at your finances each month. Similarly, you may be unable to wear a dress with pride knowing that the loan repayments are affecting your disposable income.

Gambling debt
Taking out a loan to gamble with is a risky move that could have horrific consequences. If you win, you may have the potential to make a lot of money, but if you lose, you’ll be paying off a future loan for which you gained absolutely nothing from. Even taking out a loan to buy clothes is better than taking out a loan for gambling – you’re guaranteed something for your money when you buy clothes with a loan, whilst a lost bet on loan may as well be the equivalent of throwing a wad of cash down the toilet. 

The Ugly
Sometimes, a debt isn’t wholly good or bad. This is where the ‘ugly’ debts come in. Usually it depends on the circumstance as to whether these debts are good or not. Here are just a few debts that you may want to give careful consideration to.

Car finance
In most cases, car finance is a bad debt. Most people don’t ‘need’ a car – it’s just something that we have out of convenience. Besides, there are cheap used cars out there that you can reasonably save up for. Car finance may be a good debt if it enables you to buy a vehicle that could be essential to your livelihood. Some cars can also be investments (this is very rare though – most cars simply depreciate in value).

Emergency loans
Emergency loans are loans used to cover emergencies. This could include anything from home repairs to funeral costs to vet bills. There are lots of different types of loans out there that are suitable for emergencies such as short term loans for bad credit. They can have higher interest rates than standard loans, but the benefit is that they take a short time to process. Whether they are a good debt or bad debt depends very much on the nature of the emergency. Being able to afford a vet bill could be essential for keeping your pet alive – this may not have much financial rewards, but the personal reward could be worthwhile. Of course, you could argue that there are other preventative measures that you can take to cover emergencies such as taking out insurance or setting aside savings, but then you could also argue that these are wastes of money if never needed. 

Consolidation loans/refinancing
Taking out a debt to pay off another debt might seem like a big no-no on the surface, however there are times when it can actually be financially sensible. Refinancing can be a way of paying off a high interest loan with a low interest loan. As a result, you’ll pay less interest fees in the long run and save yourself money. There’s also the option of a consolidation loan, which can allow you to pay off multiple debts with one loan, so that you only need to keep track of one debt repayment instead of multiple debt repayments. This can also save you money in the long run by lowering your interest rates. All in all, it all comes down to whether you really are going to spend less in the long run. If you fail to keep up with payments for a consolidation loan, you could end up accumulating extra fees and spending more overall.

Credit card debt
Credit cards are different to most other forms of loan in that you can get rewards for good spending. As a result, some people do make money by using a credit card, but this is rare and it requires you to be very careful spender. Whether credit card debt is good or bad also depends very much on what you’re spending your money on. Using your credit card to buy business tools could be something that eventually leads to a return, however using your credit card to buy a flatscreen TV may not be such a positive investment. 

Debt to friends and family members
Borrowing money from friends and family members can often mean no interest rates. You also generally have more flexibility as to when you pay your friends and family back. However, such debts can affect personal relationships – especially if you don’t pay these debts back as promised. It all comes down to whether you trust yourself to pay these people back. A loan from a friend or family member could be financially beneficial compared to using a professional lender, but there’s more at stake if you fail to repay your debts.

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