You may have heard people differentiate between good and bad debt. It can be easy to guess what these might be, but when it comes to deciding whether the debt that you are taking on is good or bad, it can be more difficult.
What is good debt?
Good debt has to fulfil three different criteria. Firstly, the item that you are buying with the money needs to be worthwhile or help you to better yourself. This could therefore include university fees, buying a home or doing essential repairs. The loan also has to be affordable for you, which means that you can manage the repayments. It is important to compare different types of loans and different lenders to make sure that you sign up for the loan that suits your needs the best.
What is bad debt?
Bad debt is when we borrow money for something which will not really benefit our situation. This could be to buy clothes that we then do not wear, update our car when the previous one was perfectly fine or other luxury items like this. Also, if we take out any payday loan online that we cannot afford to repay this would be considered to be bad debt. Lastly, if we pick a loan that is expensive because we have not compared them, then this would also be considered to be bad debt.
How to tell if debt is good or bad
Knowing whether debt is good or bad is not always that easy. This is because although the criteria can be easily explained it is not always easy to know whether you loan fits in to them.
For example, if you need a car to get to a job, but you will be doing a three-month probation and do not know whether you will keep the job afterwards is it worth taking on a loan to pay for the car? It is a big risk as you may be left with a loan and no job after three months. But if you do not try to go for the job then another opportunity may not come up. It is very difficult here, to decide whether the loan is good or bad.
With the repayments, it may also be difficult. You will be able to look back at checking account statements to see whether you would have been able to repay the loan in the past but we cannot predict what will happen in the future. We are usually safe to assume that we will keep our job and still have the same income but this may not be the case. Some of us will have better job security than others and it will depend on the employment contract that we have. Even if we do have a secure job, there is always a chance that we may lose it and this can be difficult to predict at time. However, if we have more than one income in our household then that will provide a bigger likelihood that there will be money available for the repayments.
Comparing loans may not be as easy as we think. Often, we can use a comparison website but it important to realise that these do not include every lender. Some lenders do not appear on these at all and these can be cheaper so it is important to look at these as well. Some comparison sites will only include certain lenders because they will pay them the most commission if people click through their links to buy the loans. This means that they only have a limited selection. Even if we do look at extra places we may not be able to include all lenders because there are just so many. The best way to make sure that you have included all lenders in your comparison is to use a final advisor. However, they will charge for their service and if the loan is just a small one it may cost more to pay them, than they will save you in finding you the perfect loan.
So, as you can see it can be quite difficult to tell whether a loan is good or bad. You need to think about your own personal circumstances and even then it can be tricky. However, if you spend the time doing the research then you have a better chance of finding a good loan that you will be able to repay for a purpose that is worthwhile. It will take time to do all of this research but it will be worth it. When you get the loan you can be confident that you have found the best possible one for you and that you will be able to repay it. You can even use this method to compare loans every so often to decide whether to switch to a different ender to save money.