As everyone knows, there is good debt, and there’s bad debt. But, distinguishing between the two can be a tough nut to crack. And, the consequences of getting it wrong can be severe, to say the least.
So, we thought we would put together this easy-to-follow guide about how to borrow money the right way. Read on if you aren’t sure what to look for, or if you are trying to get yourself out of a financial fix.
Good debt
First of all, any borrowing has its merits – but it’s the long-term effects on your finances and credit history you have to watch out for. That said, various types of debt can be seen as ‘good’. For example, a student loan can help you get through university, get qualifications, and give you the chance of a better wage in the future. A mortgage gets you on the property ladder while business investment allows you to expand your market. In most cases, all of these types of debt give you a chance to improve your life.
Bad debt
Bad debt is, in simple terms, any debt that costs you a lot of money with little return, or something you can’t afford to pay back. A good example would be buying a flash car for a lot of money, despite the fact you have one. Or, taking out a payday loan with an extortionate interest rate. Using a credit card for everyday living costs is also a bad idea – unless you are paying it off straight away to build credit.
Basic guidelines
So, from these two simple facts, we can now look at ways to make sure you embrace better borrowing. There are a few things you should always do whether you are looking for a debt consolidation loan or taking out a credit card. First of all, check whether you can afford to pay back the money you borrow. You’ll need to know the amount of interest you have to pay over the entire period, and then you should compare it with other offers. It’s impossible to predict the future, but you should also look into the likelihood of interest rates rising. And, of course, make sure that you understand the terms and conditions of any loan you take out.
Big no-nos
There are several golden rules to better borrowing that you should never break. First of all, never borrow anything without having a robust payback plan in place. It’s not good enough to go with the minimum payments laid out by the lender. It will take years and a lot of money to pay it off if you go down this route. Secondly, stick to your means. Credit cards should never pay for a celebrity lifestyle if you are only working part-time on the minimum wage. And, finally, use your common sense. If someone offers you a lot of money via a loan, and you have bad credit, you know there will be enormous interest to pay. No matter how dire your financial situation might be, never accept their offer.
