How to Tell Good Debt from Bad Debt

Often debt is split into two types; good and bad. Some people feel all debt is bad and that it should be avoided and others feel that debt is fine and there is no such thing as bed debt. However, it is worth understanding more about the different types of debt and why they are categorised as good or bad.

Sometimes it is quite easy to decide whether a debt might be seen as good or bad. If you borrow money to buy a house, then the house value increases and so by the time you pay the debt back, the value of the house has risen by more than the cost of the interest, then this would be good debt as it was more like an investment. If someone borrows money to pay for an expensive sports car, when they have a good car already and they cannot afford the repayments, then this could be considered as bad debt. However, it is not usually so easy to classify other types of debt.

Some people feel that if you have spent time considering whether the loan is a good idea, calculated which the cheapest and if you can afford the repayments, then it is a good debt. It has been well considered and it is affordable. However, other people would only see a debt as good if it paid for something that improved you finances, such as a mortgage, student loan or a car to drive to a better paid job.

Debt is often a much more personal decision though. It is easy for someone to say they would not borrow money in a certain situation but there are lots personal reasons why we choose to have debt or not to have debt and equally these can cause us not to be wise with our borrowing. For example some people are prepared to take a risk and will be happy to borrow high amounts of money and only just be able to make the repayments, but if interest rates increase or their expenses rise or salary falls, they will not be able to pay it back. Some people do not like the idea of being in debt at all and constantly feel the burden of it hanging over them. This can mean that they will avoid debt, when they could be better off if they use it. Some people know that they can be irresponsible with their spending and so decide to avoid any sort of debt and others know they are self-disciplined and so are prepared to have some debt as they know that they will pay it back.

What you want to borrow for can often be the judgement made as to whether the debt is good or bad. If you want to borrow money to buy luxuries then it is normally frowned up and if you want to borrow it for necessities or things that will improve your future finances, then it is considered okay. However, most situations are not that well defined. For example, buying a home should be a good investment but if you buy a property in an area where house prices fall or homes become unsaleable or if you cannot keep up with the repayments and it gets repossessed, then you could lose out. The same with a student loan which should be seen as an investment in your future but if you do not pass the course, drop out early or do not find a good job, could be considered to be wasted.

This is why it is so important to think hard about all forms of borrowing. Make sure that you are confident that you can make the repayments, that you are using the best type of loan, which is the cheapest option for you and that you feel that the borrowing is justified to you. Everyone will differ in their opinion and so you need to make the right decision for you in your own personal situation. Only you know how you feel about debt, how secure your job is, how disciplined you are about repayments and things like that. It needs to be a well-researched, hard thought decision based on you and perhaps your partners income, personality and requirements.

How to Decide Whether to Borrow Using an Overdraft

An overdraft is something which many current account holders get offered. It works so that if you spend more money than is in your account, you can get a bit extra using the overdraft. There will be a set amount that you can use, although some people also get an unauthorised overdraft by borrowing more money than they have arranged with the bank or by borrowing when they have not been offered an overdraft.

In theory they do sound like a useful way to borrow money in an emergency because it will just be there for when you need it. You do not have to apply and so it will not matter if your bank is not open, you will be able to get your hands on the money. You can even take it straight out as cash if you use an ATM to get it. However, this could mean that it is too easy to get. If you do not regularly check the balance of your current account then you may accidently draw out too much money and find that you go overdrawn by mistake. This is easy to check with a cash machine, as you can normally request a balance. However, if you are using a debit card or forget to check the balance then you may find that you easily go overdrawn.

It is worth having a good understanding of how charges work for being overdrawn as well. You could be forgiven for thinking it is quite cheap, but most overdrafts are actually very expensive. Make sure that you check first if you are considering using one as you may find that a credit card or even some short term loans will be cheaper. You will not only pay a flat fee but also a percentage of interest. This will be charge on any money owed until it is paid back. You may find that you have to keep borrowing more until you get paid and so this could be quite a long time. Some people find that they use their overdraft every month and because of the charges they may have to borrow money further and further away from their last payday so they have more and more interest added until the debt gets so big they cannot pay it off when they get paid. In order to try to stop this you will have an overdraft limit, so there will only be a certain amount that you can borrow. However, sometimes it is possible to still borrow more than this and have what is known as unauthorised overdraft. This also occurs if you borrow money and do not have an overdraft arranged at all. An unauthorised overdraft is much more expensive and with the fees and interest added together they can be dearer than payday loans.Another problem with an overdraft is that there is not a big pressure to pay it back. Obviously the costs are enough to motivate some people to repay it as quickly as possible, but unless you look at your statement, you may not be able to see these. If you do not have access to online banking or a cash machine, you may not even be aware that you are overdrawn. If you do not check regularly, then it could be worth seeing if there is a way that you can or make sure that you have a big buffer of money in the account to prevent you from going overdrawn. You will not be asked to make repayments, but as soon as money is credited into your account it will be used to pay it off.

Like any other type of borrowing you therefore need to think very carefully before using an overdraft. You need to decide whether you really need the money or whether you can manage without it. It will depend on what you need to spend it on and how long you can wait before you have to get it. Also consider the different costs of different forms of borrowing and work whether it might be better to use a credit card, for example. You may have other channels available to you and it could be better to use them, if they are cheaper. It can be difficult to find the time to do this sometimes, particularly if you are in a panic about getting money quickly, but it is well worth trying to be calm and carefully consider your options.

What is the Best Type of Loan in an Emergency?

If you need money in an emergency then your options could be limited. Applying for most loans takes a lot of time and this might be something that you do not have. It does not only take time to fill out the paperwork but then you have to wait for them to be approved and this could take a lot longer than you can wait. Therefore you may not have many options.

It can be wise to prepare for such a situation by having some money available for when you need it. This could mean that you save some money each month and build up a small pot so that if you need some money in an emergency then you can withdraw some. Even if you just put a small amount of money aside, it could soon add up to be enough to help you when you need it. If you do not think that you would have the resources, self-discipline or time to save up like this, then you could try to get some credit arranged that you could use. You could get a credit card or apply for an overdraft. These will then be available for emergencies. If you suddenly needed some money you could use them to help you. One problem with this is that some people would be tempted to use them when they really did not need them. For some people, knowing that money is available, means that they will just go and spend it and use the credit card or overdraft up, even if it on things that they do not really need. If you think that you are likely to do this, then it will be much better not to get one in the first place as it will not help you at all. Another problem is that there is no formal repayment system with these. The credit card will need a minimum repayment each month but there is no pressure to pay back more than this and the overdraft will just be repaid when money appears in your current account. This means that you can find that the interest on these can build up really quickly without you necessarily noticing and they could end up being very expensive. So if you do use them, make sure that you pay them back as soon as you possibly can. Remember you can always borrow again using them if you need to but if you pay them back quickly, you will have less to pay out in interest and will therefore be less likely to need to borrow more.

If you do not have anything to fall back on, then you may not have many choices in an emergency situation. It could be worth starting by looking for friends and family to help though. There may be some that will be more than willing to help you out and will not mind letting you have money interest free and giving you as long as you want to pay them back. However, not everyone has this sort of help available to them. A credit union can be another option, although you may need to have savings with them before they allow you to have a loan. It is worth checking though as they could be a reasonably priced option. As they are usually small local companies, the rules will differ between them so ask at your local citizen’s advice bureau to find out more about them.

Many people will use a short term loan such as a logbook loan or a payday loan in an emergency. This is what they are designed for but they both carry a high element of risk. If you do not keep up payments on the logbook loan, your vehicle will be taken from you in lieu of the missed payments. If you do not make the repayment of the payday loan on time then you will be charged fees and these can be really expensive. These should be a very last resort and even then you should think really hard before using them. Make sure that you have no other options which are better before even considering if this is something that you should do. If you have no other choice, then make sure that you compare the different companies in order to get the one that is the cheapest and has terms that are best suited to you.