'GOOD' DEBT vs 'BAD' DEBT
Financial education for young people 👨🎓👩🎓
What Is Debt?
Debt is money owed by someone (the debtor) to someone else (the creditor), and usually paid back with interest (more here on how interest rates work). Meaning, the borrower pays back what they borrowed plus a percentage of the borrowed sum on top.
Example: You borrowed £100 at 10% interest, so paid back £110 (£100 + 10%) in total.
Interest rates are often volatile (so may go up or down rapidly - as we saw in 2022) and can change with inflation so it is very important to think about that when getting into debt.
Good Debt 😺
This is considered as typically low interest loans from a reputable lender
Most people consider student loans taken out to cover university tuition fees as ‘good’ debt as it has relatively low interest rates and degrees generally benefit degree holders in the long run 👩🎓
Another form of good debt can be a mortgage, as buying a house increases your stock of assets while giving you somewhere to live 🏠
Bad Debt 🙍
Debt is considered as ‘bad’ when it can’t be recovered or paid off cheaply or easily
This can happen if people borrow beyond their means (anticipated disposable income) or aren’t mindful of interest rates affecting their abilities to pay off debt
This can lead to future problems with poor credit scores, debt collectors/bailiffs as well as a cycle of unpaid debt, financial anxiety and stress
Quick Tip (how to avoid bad debtors)
Avoid borrowing money without doing your research, pay attention to the terms and conditions of each product (loan, credit card, Buy Now, Pay Later), work out a budget beforehand plus the cost of borrowing (the interest you'll have to repay) and of course avoid loan sharks🦈like Mr. Krabs 👀
What To Look Out For When Borrowing Money:
LOW INTEREST: Interest rates are often volatile and can change with inflation so it is very important to think about that when getting into debt. Getting fixed loans means that the interest rate remains the same for a given period of time which may be good when inflation is anticipated.
CREDIT CHECK: Applying for a loan or credit card often involves a soft or even hard credit search, which can negatively impact your credit score. So before clicking on the submit button, pause and find out if a soft or hard search is involved.
REPUTATION: Do your research on the lender. Do they have a reputable customer service? or are they notorious for disregarding customers? what are customers saying?
REASON: Think long and hard about the reason you are going into debt. If it is to buy a very expensive handbag that could easily get stolen or lost, maybe reconsider your options. However, if it's to get a mortgage to purchase a house or to pay tuition fees for a degree then it may be more worthwhile.
INCOME: This is a big thing to consider when taking out a loan. Most banks will check this beforehand but make sure you can realistically afford it and will have a stable enough income to pay off your debt payments AND the interest attached to it!
KEY TAKEAWAYS FOR YOU
1. Background check - make sure to check that whoever you borrow money from isn’t exploiting you or the situation you're in and that they have a good reputation by doing extensive research on them beforehand.
2. Realistic - ensure that you will be able to pay off your loan in the specified time (including interest) with whatever form of income or financial assistance you receive. Take into account any necessary expenses you will incur.
3. Last resort - try to make borrowing from loan sharks your last resort. Think about whether what you need the money for is essential or if you can borrow from someone else such as a family member or a friend.
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