Most people get into debt at some time of their lives. In fact, debt is often willingly sought after by many people who want to buy their own homes. House prices are so expensive that most ordinary people have to borrow money by way of taking out a mortgage, and these mortgages get paid back over many years – usually up to 25 years.
People also often buy other expensive things like motorcars for example by taking out a short loan over a number of years, anywhere from 1 to 6 years in fact.
There is nothing wrong with being in debt. As we’ve shown it is quite normal. But the key thing to remember before you take on any sort of debt is to make that you can afford the repayments.
There are two types of debt; good debt and bad debt, so let’s take a look at these, starting with good debt. If you need assistance with debt management, or are interested in learning more about saving, budgeting and investing then check out the free ‘Money Academy’ resource here for instructional videos.
What is good debt?
Good debt can be seen as a way of investing in your financial future. It’s something that will enhance your future personal wealth. Taking out a student loan is a prime example of good debt. This is aimed at bettering your future employment, and money earning potential. Another good example is taking out a mortgage on a property. Properties generally increase in value over time, increasing your own financial wealth.
Business loans are also another type of debt that can come under the good debt category; but not only must you do your research thoroughly, you must also develop a sound business plan, before applying for business finance.
Prior to taking out any sort of loan you must do your research properly. First, you need to clearly understand the details of the loan. What is the repayment period? How much interest will you be charged? What is the size of the repayments? These are all key things you need to know.
The same size of loan can have different rates and conditions depending on the lender, so you need to establish the best offer available.
Good debt management begins at the research stage, before you decide to take out a loan. If you can’t afford it in the first place, no amount of good debt management will get you out of trouble if you proceed. If you do find yourself in severe difficulties you can always talk to a debt consolidation specialist.
What is bad debt?
If good debt is debt that is taken on to increase your future wealth, bad debt is just the opposite. It decreases your future wealth in return for what may just be a passing fancy. It is also true that good debt can all too easily turn into bad debt if you can’t keep up with the repayment schedule.
However there are some seemingly bad debts that can also double up as being good debts. Take a short-term loan like a pay-day loan for example.
Providing you do your research well and ensure you can repay the loan on time and not jeopardise your future financial well-being, this type of loan can help you over a cash crisis. If your car unexpectedly breaks down and you don’t have enough cash for the repair, but you need your car for work; a pay-day loan could be the answer.
The importance of debt management
However, with something like a pay-day loan, this is where debt management is key. You need to look ahead to see what you can do in terms of budgeting, so you can repay the loan when its due and still stay liquid until your next pay cheque arrives.
You might decide to stop smoking for a few days; even better – stop completely. You could cancel any social activities for two or three weeks. You might even decide to start that diet you’ve been promising yourself, and buy cheap, fresh produce for a while.
Debt management is all about budgeting. Agree a budget and stick to it. If you do, and you did your research properly, this can help you to weather the storm until your debt is cleared.