It is natural that many of us will worry about any debt that we are in. We may have heard about good and bad debt and wonder what type of debt we have.
What is good debt?
Good debt is when you borrow money for something which will help you in the future. This could be a mortgage so that you can buy a home and be rent free once it is paid off. Another example is a student loan where you get an education which leads to a higher paid job in the future. These are considered to be good debt because they get you things that you will not otherwise be able to afford and they have a positive impact on you.
A good debt is also one that you have researched well. It is wise to make sure that when you do take out a loan that you find the best possible one. This usually means that you find the cheapest one, but also could mean that it offers the best value for money, manageable repayment amounts and reasonable fees. It also means that you have chosen the best loan for you.
What is bad debt?
Bad debt will be a loan to pay for something which is not necessary; perhaps using it to buy luxury goods that you can easily do without. Even though people do take out loans to purchase such items often. Also if you take a loan quickly without thinking about which type would be the best for your needs and comparing prices to make sure that you are getting the best value for money. There are many examples of bad debt such as taking out a payday loan to pay for new dress when you already have a suitable one or going overdrawn to have a meal out when you had food at home. Sometimes debts such as overdrafts or credit cards can be easy to build up without even realising because you do not keep a close check on what you are spending. This would be considered to be bad debt as well.
How to tell what you have
Knowing what type of debt you have, can actually be more difficult than you might think. Debt is not always that easy to categorise into good or bad. For example, if you need a car to a job and you borrow money to buy it, you are taking a risk if you have a probation period or a zero hours contract as you may not always have the job but it could have a big positive impact on your future. You should know the reason that you took out the loan or borrowed the money and so this might help you to decide.
You will also know whether you researched different loan types to find the one that was the best for you and then compared different loans of that type to find the one with the most competitive rates. You will also know whether you did this really thoroughly or whether you did it quickly and compared just a few companies.
What difference does it make?
The difference between good and bad debt is big, as you can see. If you borrowed for a purpose that was not an emergency and have bad debt, there is nothing much you can do about it now. However, if you did not get the best type of loan or the best loan of that type, then you can do something. As long as you are not tied in to a fixed rate period with your loan, it is possible that you will be able to change it. Find out from your lender whether there is a penalty for changing lenders and whether there are any other costs involved. Then you can research different types of loans to look for the best one and also see which will be the cheapest for you. Once you have looked at the different costs, you will be able to see whether it will be cheaper for you to swap. If it is, then look at the lender, find out what the repayments will be, what the term of the loan is and what the reputation of the lender is like. Once you are happy, you will be able to swap if you think that it will be worth it. It should not take that much hassle and you can end up saving a lot of money. It could even be worth seeing whether you can repay the loan early. If you have the funds available this can be a really sensible thing to do because it will make the loan a lot cheaper. By paying it early, you will have less interest payments to pay and therefore you could save a significant amount of money depending on how much you borrowed and how long you are repaying it for. It is always worth trying to save money, even if it is just a small amount, so it is good to take a look.