We find at JMR Solicitors, debt advice is required more and more in today’s world. Some people approach us talking about “good” and “bad” debt and certainly, there are some debts that can be classed as ‘good’ debt, whereas you’ll find some things are classed as ‘bad’ debt. We make the distinction between the two within this guide.
Personal Insolvencies have risen by 55%
New figures show that Personal Insolvencies have climbed by 55% over the last year and are likely to double in the next twelve months. Debt is, therefore, a rising problem for so many people.
Debt is used to pay for many things in this day and age, the greater the item, the more likely you will use debt to finance the purchase.
It’s worth noting that, some things are worth going into debt for, others can leave you in more trouble than they are worth if you cannot afford repayments.
Examples of ‘Good’ Debt
Here are some examples of debt that can be considered as good, because in most cases it is presumed, they may allow you to make more money in the long-run.
- Education – if you take a student loan for education, then this is the graduate will have almost £60k in student loans debt when you finish your education there. However, it is assumed that when the debtor finds employment, it will help them gain higher salaries and therefore, you can class this as good debt.
- Small Business Loan – Entrepreneurs looking for funding to start their business may decide to borrow from banks. This is in the hope that they can increase their profit and grow the business, so again this is good debt.
- Mortgage for properties – Many people will get into debt to buy a house, because of the large sums of money needed to finance this purchase. This again, is classed as good debt, because the property is very likely to increase in value while you reside in it, plus the mortgage money can be used to invest in other properties such as buy-to-let properties so a profit can be made from the rent.
- Investing: some may go into debt in an attempt to produce income and wealth from investing in stock market-based investments. As there is a potential to make money from this, once again, it can be classed as good debt.
It is important to note that there is no assurance that the debt taken on can be 100% classified as sensible and a ‘good debt’. For example, the investment you made on the stock market may crash. Or, the student may not go into a career which is higher paying than he would have done without the degree. The small business may not succeed and there may be a housing crisis or crash.
Examples of ‘Bad debt’
Rule of thumb is, if the thing you bought with debt will not go up in value or generate an income, you shouldn’t go into debt for it, unless you absolutely can afford it and need it.
Some examples of ‘bad debt’ include the following:
Cars: Cars, unless they are classic models are depreciating assets. This means that as soon as you buy one it will go down in value, often quite rapidly in the first three years. So these brand spanking new cars from the dealership look great and enticing with low monthly premiums, but in fact, the finance is a debt that can be classed as bad debt. Plus, the more expensive the car the more money you lose.
You’ll be aware of the fact that the debt you take on to pay for or finance the car does not change or reduce in line with the car.
Makeup, Clothes, Consumables and Goods: These items are similar to purchasing a car – they do not make you money and can often be worth very little second-hand. So, going into substantial debt for these items is not wise.
Credit cards: they are a classic example of bad debt. The interest rates charged are expressively higher than most other kinds of debt and interest rates paid on a credit card each month is money you’ll never get back!
What to do if you find yourself in debt:
If you are struggling to pay the finances on your debts, here is some advice to follow to avoid the clauses that could potentially make your debt problem worse:
- Always acknowledge all letters and calls, because ignoring the problem does not make it better, it actually will make the problem worse
- Don’t borrow more money to pay your debts off without getting professional advice
- Don’t secure unaffordable debts against your home, as it will leave you in a worse situation and possible repossession! Try getting advice about this if you are thinking about doing this!
- Always seek advice from a legal representative to help you organise your debts before they get out of hand.
Getting legal advice for your debts
Even though some people classify debts as good and bad, it’s always arguable that no debt is ever good. Even good debt has a risk factor and therefore it should be done with caution.
If you would like to speak to a specialist insolvency and debt solicitor about your finances, please call on 0161 391 4944 or email email@example.com