There is no doubt that debt that is badly managed can be problematic for everyone and it’s important to make sure that the level of debt that you have doesn’t overwhelm you. However, the purpose of debt is not to get individuals into a sticky spot but out of it. It should be about achieving your dreams earlier than you might otherwise be able to if you had to save up first. There are many different types of debt in modern society and most of it is designed to be constructive and to help you move your life on another step – if responsibly managed it can do just that. But what kinds of debt are there and how might these help?
The most common type of debt by far in the UK, a mortgage is essentially a long-term loan. At its simplest, a mortgage is supplied by a lender in order to enable the borrower to buy a property – without a mortgage most people wouldn’t be able to afford to get on the property ladder unless house prices dropped significantly. Most mortgages run for a term of 25 years but this period can be varied. A mortgage is a type of secured lending, which means that it is borrowed against an asset that the borrower has – in this case the property. If the person borrowing the money is unable to repay the mortgage or starts missing mortgage payments then the lender can possess the property and sell it to pay itself back, but this is a worst case scenario. The reason mortgages are secured is that they are much larger sums of money than regular loans.
Most businesses need some help when they get started and financing is often a key issue. Some business owners may be in a position to put cash into a company but for others it may be a case of looking to borrow. In this situation, a business loan can be the difference between a company getting off the ground or never existing at all. Most successful businesses have had loans at some point and debt is a very normal part of business funding in 2015. It provides a bridge between the business starting to make a profit or perhaps an investment arriving and can tide an organisation over until there is income to meeting its outgoings.
The accepted wisdom on what constitutes a ‘good’ debt and a ‘bad’ debt when it comes to personal loans is normally based around what you’re planning to spend the money on. For example, if you’re borrowing to invest in something that will generate a return later on then this is considered a good debt. This could be something like weatherproofing your home, which will save on repair bills and possibly lower your energy bills. Another example might be borrowing to invest in an educational course that you want to do that will result in a qualification you can use to earn money or progress your career.
If you have a situation where you find yourself dealing with an unforeseen emergency then debt can come in incredibly useful. You might, for example, require a piece of equipment such as a laptop for work – if your current machine breaks, you don’t have insurance and there are no savings to cover the cost of a new one then a a quick loan can be an easy way to get yourself back up and running quickly without downtime that may affect your income. You could experience a disaster around the home, such as a flood or a fire – even if you do have insurance, loans can be very useful in situations such as these to tide you over until you’re able to make an insurance claim.
It’s true that credit cards are often blamed for many of the problems that individuals have with debt in the UK but there is a positive side to them too. If you can use your credit card sensibly then it’s an easy way to make purchases, that comes with fraud protection, and on which you can minimise any interest you are charged by quickly clearing your balance. If you do pay interest then the better your credit rating the lower that interest is likely to be. Plus, there are many credit cards that offer rewards schemes for frequent credit card use and these can yield some pretty impressive results. Everything from air miles to cash back is available and well worth it if you’re not running up a monthly interest charge too.
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