The topic of debts is not as simple as some people would think. It takes some investment of your time to understand all that you need to know about debts and their type. Moreover, there are some aspects of debts that you must know in order to be able to deal with them. Whether a debt is worth getting into is probably the most important thing to consider.
In relation to this, you will find that all debts can be classified as good and bad. Knowing the difference between the two can help you prevent an undesirable situation such as bankruptcy. So, keep reading for all the useful information that you need to know if you owe a debt. You must also get to know about good debt versus bad debts.
How do you know when a Debt is good?
A debt that will get you to a better financial condition, or at least not a worse one, can be called good. Now, if you think of the short term, it might seem beneficial for you, but in the long run, it might seem like a risk that’s not worth taking. So, in order to make sure debt is good, you must always think of the long term.
Also, you must be sure that you’ll be able to repay it. Try to get the lowest interest rate you can find so that you can afford to repay it as soon as possible. The terms of the agreement between you and the creditor also play a role in determining whether the debt is good. You might be able to get a better understanding with the help of some examples.
A loan for the purpose of your business that is beneficial in the long run is a great example of good debt. These types of loans are generally taken after careful planning. If everything goes well, it will be a great investment.
Yet another reliable example of good debt is a student loan. In this, you’re required to pay only after you start earning. If you do good for yourself, you’d have no trouble repaying your student loan. In addition to that, the interest rates are low and you have to pay only after your income crosses a certain amount. An increasing number of students complete their higher education with the help of these loans.
How to know if a Debt is bad?
The very first sign of bad debt is that it only adds to your expenses in the long run. As such, you might have trouble paying it back. When it comes to planning, there might seem to be no way these debts can be returned affordably.
In other words, unlike good debts, bad debts won’t have any positive effect on your finances. If you’re getting such a type of loan, you must make sure that you’ll be able to pay them off as soon as you can.
So, if you’re unsure about whether you’ll be able to pay back the full amount, you would be better off without this debt than with it. You must try to completely avoid these types of loans.
The money you borrow to pay another creditor or for your expenses would perhaps be one of the best examples of bad debt. This type of loan clearly doesn’t make your financial situation any better in the long run, and could even result in it getting worse.
Another good example would be a car loan that is more expensive than what you’d find comfortable to repay. This would clearly be an unnecessary risk to take.
What are the ways to prevent getting into bad debt?
After understanding the difference between good and bad debts, it would become easier for you to find a good one. There are some steps you can take to make sure you avoid bad debt.
Try to find the lowest interest that you can
When going for a loan, you must make sure that you get the least possible interest rate that you can. Now, that would differ from one debtor to another. So, don’t be hasty in making a decision. Look for as many creditors as you can and compare their rates.
Moreover, the idea behind this is to be able to repay it as affordably as possible. Also, it would help you clear the debt as quickly as possible, meaning you have to pay a minimal amount of interest overall.
Always consider the stability of the interest rate
When you borrow money you must keep in mind that the interest rates can decrease or increase with time. In this situation that we’re facing now due to the COVID-19 pandemic, let’s say the interest will rise. That would mean repaying them would be more expensive. So, you must make sure that you’ll be able to afford the instalments if that happens.
Look for affordable monthly instalments
One of the most important things to ensure when getting a loan is that you’ll be able to pay the instalments. That would allow you to pay the full amount within the minimum time period required.
Compare the risks and benefits
In the case of good debt, the risks would always be outweighed by benefits. So, you must calculate and compare both. That would help in making a decision whether you must take the loan. If you’re confused about this, which often happens, you can contact a financial adviser. They would surely be able to help you out on this matter, as they do so for many people throughout the year.
Go through the terms and conditions of the debt
When getting a loan, it is very important that you know the terms well. This way you’ll be able to avoid potentially bad debt and hence might avert a serious disaster in your life.
What should you do if you’re in Bad Debt that you can’t repay?
If you find yourself in bad debt, you must know that you’re definitely not alone. There are lots of people who face this situation every year. As such, there are different options available to them for dealing with their problem.
However, not all of them are best for all cases. Thus, you must choose the one that’s the most suitable to deal with your debt. Now, you might understandably not be able to determine this by yourself. That’s where debt advisory services can come to your aid. Many of them even offer their services free of any cost. In addition to that, some of them even don’t require you to go to their office in person. You can simply get a solution to your problem with a call or online chat.
You can go for informal payment arrangements with your creditor or a formal arrangement like IVA, in case of multiple creditors. Other than these, you can also get a Debt Relief Order which can write off all your debts. Another option that might write off your debt in bankruptcy, though it is worth opting for only if there’s no other option left.
In any case, you just shouldn’t make any delays or ignore payment reminders from your creditors. That would only get you deeper in trouble. Act quickly to write off all your debts.