The Difference Between Good and Bad Debt

The Difference Between Good and Bad Debt

Although most people will hear the word ‘debt’ and instantly think ‘fear, panic, hard-times’ not all debt is considered to be bad.

It is worth taking a few minutes to understand the difference between ‘bad’ and ‘good’ debt as in some cases debt can actually help you when you’re applying for credit and can also encourage you to be smarter with your money.

Good Debt

Think of good debt as being affordable debt, that may be seen as a sensible investment towards your future. So if you can afford to repay back the amount you owe each month and it will make you better off in the future this debt isn’t considered to be bad debt.

Examples of this would include;

Mortgages – property has proven to rise in value over the long-term

Student Loan – A common debt but an investment in your future. This type of loan offers some of the lowest interest rates

Investing in your own Business – The hope is that you’ll earn more from your business than what you put in however it does depend of the type of business or trade

Credit Cards & Loans – If used sensibly and correctly, these can help you create a credit history which can help if you want to purchase a mobile phone or apply for a mortgage etc

New Car  – As long as the car is affordable to you, running a car may be cheaper than paying for public transport each day as well as saving you time. If you purchase a new car however that is likely to depreciate in value, this could be considered bad debt.


Bad Debt

Anything you cannot afford to repay or won’t improve your life further down the line is considered to be bad debt. Or something that will depreciate in value is also considered bad debt, such as above in terms of buying a brand new car.

Borrowing for Consumables – The weekly shop, clothes that will depreciate in value or items with a short life span are considered to be adverse when it comes to paying for them with credit

PayDay Loans – The interest rates on payday loans can be much higher than other forms of lending when it comes to making payments off of the debt. This type of debt can quickly spiral out of control.

Anything Unaffordable – Always stick to the rule of thumb that if you can’t afford get out if it then don’t enter into it in the first place. Only ever borrow what you know you can afford to pay back.

If you stick to the rules above then you should always be able to be pretty savvy when it comes to money and making investments.

If you’d like some financial advice be it about Debt, Mortgages, Protection, Wills, Estate Planning, Pensions, Investments or simply a Financial Review please don’t hesitate to get in touch. You can call us on 0800 044 5733 or complete the form below and we will be in touch shortly.

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