The average household debt in the UK is £65,151. For most people, that debt is made up of secured debt (like a mortgage), but can also encompass personal loans, credit cards and store cards, and ‘buy now, pay later’ schemes. While getting into too much debt can create problems, some forms of debt are actually considered positive, and in some situations can be embraced rather than avoided. In this article, we run through the good, the bad and the ugly of debt so you can improve your financial situation without setting aside the positives.
Is there such a thing as good debt?
It might sound weird to describe some debt as ‘good’, but in some situations, taking on debt can actually improve your finances. This can be true when you are making an investment that is sure to produce a return.
An example of this would be a mortgage (a loan to buy a property). Because property increases in value over time, and usually increases faster than the rate of interest you pay on your property, you are likely to end up with a profit. Another form of investment that may involve taking on good debt is a business loan ‒ if your business succeeds. Or you may choose to invest in your education, leading to better employment prospects and better finances overall.
Before you choose to take on one of these forms of debt, it’s important to make sure you are able to keep up with repayments, and that they don’t take too much of your income. Otherwise, you could end up in a difficult position with regards to your other commitments.
Bad debt: what to watch out for
Other forms of debt may be more likely to have a damaging effect on your finances. Borrowing to buy a depreciating asset (something that loses value over time), such as a car, can be a form of bad debt if you take out a loan with high interest payments. This will mean you pay much more than the car is worth, and will not be able to sell it for this value to recoup your costs. Similarly, borrowing too much on credit or store cards can incur high interest bills.
It’s difficult to avoid buying some of life’s necessities, but if you need to take on some debt to do so, it’s important to look for lower cost credit options and to limit the amount you borrow. Check what your monthly repayments would be, and the overall amount you would need to spend on your purchase. Ensure you are able to make the minimum repayments, if not more. The quicker you can settle your debt, the less interest you will pay.
Ugly debt: what to avoid
Certain types of debt can be particularly difficult to deal with. This is most likely where there is such a high interest rate that any delay in repayment can mean you’ll be paying much more than you need to.
Sometimes, people resort to taking more loans in order to pay off their original debt. This can lead to a debt spiral, where someone takes on more and more debt. This can damage their credit rating, too, so lower interest rates are harder to obtain.
If your debts are too hard to manage, or you feel you’re in a debt spiral, you can seek help. See your coaching journey on Maji for more details.