Debt is part of modern life – figures from The Money Charity indicate that in the UK the average household debt (inc. mortgages) is around £54,000 and collectively we owe £1.460 trillion. That’s mortgages, unsecured loans, credit cards, overdrafts, stored card, homeowner loans, etc. So, it’s very rare to come across someone who hasn’t some form of borrowing, particularly if they are younger. The idea behind consumer debt is simple – rather than saving first and then spending, borrow the money, make the purchase to get the benefit earlier and then worry how to pay it off. Yes, there is always the potential to get into trouble with debt but using it sensibly can help set you up for the future.
Borrowing to fund a property purchase is one of the most typical types of debt in the UK. We are a society very focused on property ownership but with house prices climbing at rates far faster than our salaries are increasing, for most of us the reality is that we need a little help getting on to the housing ladder – and a mortgage provides that boost. Only 33% of households in the UK own their home outright, meaning that the other two thirds is still reliant on mortgages (or renting). Mortgage lenders may require anywhere between 10% and 20% as a deposit but government schemes such as Help to Buy can reduce this to just 5% with the government covering the rest.
“Good” debt? Yes. Mortgages are often the only way to get onto the housing ladder, and the asset should increase in value considerably over the life of the loan.
Clearing high interest balances
Another reason that many of us venture into debt is to help balance out the effects of another type of debt. It’s not that difficult to find yourself in trouble with debts – you may have applied for a credit card when it was interest free on purchases, spent it to the limit and then found yourself with an enormous balance when the interest free period runs out. Although this isn’t an advisable way to manage your debts, that’s not to say that it doesn’t happen to many of us. Using a lower interest form of debt to clear a balance such as this is an advantage for several reasons. Not only can you reduce the burden of the interest that you pay but this will help you to repay the debt faster and focus on prioritising clearing it.
“Good” debt? Yes. Reduce the level of interest to pay back faster.
If you’re creating your own business then debt can play an essential role in helping to get your venture off the ground. For those businesses just starting out, sometimes the only way to get a small injection of cash is for the owner to borrow against their own name as the business does not, as yet, have anything to offer a lender. This type of borrowing could help pay for everything from buying stock to marketing costs and wages and could make the difference between a business idea reaching its market and never getting there at all.
“Good” debt? Yes. Investing in the future of the business to take it to the next level.
There is an argument that education should be free but in a world where that simply isn’t the case after the age of 18, borrowing to fund an education is commonplace. Many people regard this as the ultimate form of ‘good debt,’ one that has become essential to anyone who wants to guarantee themselves a swifter entry into the jobs market. University graduates typically get paid more than those who have not taken a degree and interest rates on student loans are usually low. Students also have access to a range of other forms of debt, from overdrafts to credit cards, that may offer favourable rates to those who are studying.
“Good” debt? Yes. Investing in your future career by using the debt to pay to extend your education, skills and knowledge.
A car has become a household essential for many of us, especially those who don’t live in a location where there is a comprehensive transport network. Taking the kids to school, getting to work and having access to shops and amenities may require a set of wheels and for many of us car finance is the only way to obtain the kind of car that we need. There are some great car finance deals around – just make sure you choose the vehicle that’s right for you practically, rather than the dream car you’ve always wanted.
“Good” debt? Yes possibly, if a car is a necessity.
Alex Hartley is a keen advocate of improving personal finance skills. She's worked at Solution Loans since 2014 and written hundreds of articles about how people can manage their money better. Her interest in personal finance goes way back to...Read more about Alex Hartley