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March 6, 2018 by
Debt can be constructive too.
Debt is something that gets a lot of negative press. Some believe that there’s just no such thing as “good debt,” and that’s it’s always preferable to wait and save than to get into debt to make a purchase. However, the reality is that for many people debt is a lifeline. Yes, it can be bad when it is used recklessly or for the wrong reasons. However, it can also make life easier, richer and be a constructive next step. So, when does debt count as “good” and when is it “bad”?
The characteristics of a bad debt
The reasons for getting into debt - and the consequences of doing so - can both have an impact on whether it is good debt or bad debt. These are a few of the characteristics of a bad debt:
• A debt that is not affordable. For example high interest debt with fees attached that costs much more than the average debt. Examples of this type of debt, according to the finance experts at Solution Loans, include loans with no credit check or a bad credit loan.
• Debt that can’t be repaid. Responsible lenders should never approve an application for a debt that clearly can’t be repaid – this is a very obvious example of a bad debt.
• Debt that is incurred for the wrong reasons. If you’re getting into debt so that you can buy a new pair of shoes or have a mini break at the weekend then the debt doesn’t have a constructive, long-lasting outcome. These are typical examples of items that are better saved for than purchased with debt.
• Debt that is borrowed from an illegal lender. This will never be a good debt because it is always likely to end up being more expensive than debt from responsible lenders.
The characteristics of a good debt
It’s true that the preferable choice for most purchases is to buy with your own money. However, for so many people today that simply isn’t an option. Debt can be a lifeline – so, how do you recognise when it’s “good?”
• It is moving your life forward in some way. It may be that the debt is going to be used to cover the cost of studying so that you can obtain a qualification that will enable you to get a better job. Or perhaps you want to use it to buy a home. If the outcome of borrowing is that your life is eventually improved then the motivation behind the debt is a good one.
• You know that you can afford the repayments. When it’s time to start making repayments a good debt won’t leave you with nothing else to live on every month.
• The interest is reasonable. Compared to other debt of the same value or size the interest rate isn’t over the average. (Note: interest rates do vary from individual to individual depending on credit scoring).
• The lender is responsible. Good debt is taken out with a lender that won’t lend without a thorough affordability assessment, that is regulated and that won’t intimidate or threaten if you run into repayment problems.
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