It can be quite tricky deciding whether you can justify borrowing money. Often, we are told we should only borrow in an emergency or that we should only take on good debt. However, it can be difficult for us to define whether what we need the money for really does fit into these categories. It can be worth understanding the difference between good and bad debt and then considering whether your debt would fit into good or bad. Do not assume because you are considering a payday loan it will be bad debt. There is no exclusion of one particular loan type just because many people seem to think badly of it, the process is different to that.
What is good debt?
There are different definitions of good debt and it is probably best to combine them when you are making your decision. Firstly, good debt is when you are buying something that will help you to better yourself. Something that you will really gain form. Therefore, taking out a student loan, assuming you complete the course and go on to get a higher paid job than you would without one, would be considered to be good debt. A mortgage would often fall into this category too, although if you take on too high a mortgage it may not.
To qualify as good debt you also need to have thought hard about the loan. Comparing different types of loan so that you are confident that you are using the best loan type for you. You also need to make sure that you compare lenders and choose the one that will offer you the best value of money. By doing this research you will make sure that you have the right loan at the right price and this is very important.
What is bad debt?
Bad debt is when you use a loan to buy something frivolous. Also, that you do no research and pick any loan and do not check to see whether you are paying more than necessary for it. It could also be if you take out a loan but cannot afford the repayments. This would be something like taking a loan out to pay for a designer set of clothing when you have clothing that fits and cannot afford the loan which is an expensive one.
How to decide
The definitions make it seem easy to decide whether you loan would be considered to be good or bad, but actually it is not that easy. Most cases are not straightforward. For example, this computer that needs to be bought. If it is for playing games, then it could be seen as wasteful, but it could be there to help improve someone’s mental health and playing games could relax them. If it for study or work, then it could seem better but if they already have a computer that works then maybe not. Also, they may be choosing an expensive computer and there could be cheaper options that could be better. Also, they may be making a mistake with choosing this payday loan. It could be that they are not choosing the lender that can offer them the best value for money, that they have savings they could use instead of borrowing or that there are cheaper loans available to them that they should be considering.
So, you can see that the decision is not simple, It depends on the specific circumstances and the borrower. It can be complex and so it is worth having a check list to make sure that you are thinking about everything when deciding whether to take out a loan:
- Is what I am buying useful or necessary?
- Are there alternative ways to buy it such as saving up?
- Am I using the right type of loan?
- Am I borrowing the right amount?
- Have I picked the lender that will give me best value for money?
- Can I afford the repayments?
By making sure you answer yes to all questions but the second then you can be sure that you are making the right decision. It may take time to do the research but it will be worth it if you are able to be sure that you are not making a mistake. Often, we can be in too much of a hurry to get things done and we may not spend the time that we need to make important decisions like this. If we are worried or panicking it can be even worse as it is difficult to think logically when we are emotional. This is why it is so important to make sure that we slow down and take some time to ensure that the decision we are making is right as it can have big consequences in the future if it is not.