Is There Such A Thing As Good Debt?

Debt is often viewed as a bad thing – and in many cases, it can be. Many people borrow money for things they could have saved up for, or have to take out loans due to poor budgeting. These are definitely examples of ‘bad debt’. However, there are times when debt can be a constructive form of investing or a way of improving your financial situation. This can be classed as ‘good debt’. Below are just a few examples.

Mortgages

A mortgage is generally considered a good debt to have. Most people cannot afford the property without a mortgage. When you take out a mortgage, you also have a property to use as collateral. As most properties end up appreciating in value, you also end up making money in the long run.

Of course, there are mortgages out there with very high-interest rates and expensive hidden charges, so you need to be careful. It’s generally a good idea to use a broker service such as this one found at sites like https://www.themortgagecentres.co.uk/. The best value mortgages typically require a high credit score to apply for. 

Student loans

Student loans can also be considered a good debt to have. Higher education can be a means to higher-income jobs, allowing you to make more money in the future. Student loans in the UK also generally don’t have to be paid back until you’re earning above a certain threshold, and may even be wiped if you don’t pay them back by a certain age. 

You should borrow solely through The Student Loans Company when applying for student finance in the UK – other loans will not have the same perks and could end up being expensive. When studying abroad, you may want to consider whether foreign student loan options are as good value. 

Business loans

Many businesses have high startup costs. A business loan can help you to cover these expenses. As a business is typically a form of investment, these types of loans can be viewed as ‘good debt’, enabling you to make money in the long run. 

There are many loans targeted at businesses, but they are not all created equally. Try to look for business loans from banks and reputable business lenders that typically charge low-interest rates. You can also look into government-backed startup loans, which tend to not have any extra fees – these can be researched here. Bear in mind that loans aren’t the only way to fund a business and that you could also consider options like crowdfunding, angel investors and venture capital funding. 

Credit-builder loans

Credit-builder loans are often issued by banks. The purpose of taking out these loans is to rebuild your credit score – providing that you are able to make payments on time, your bank will put in a good word to credit agencies and your score will increase. This makes these loans a good form of debt because ultimately you are better off financially at the end by having a better credit score.

Most credit-builder loans are not worth much and have fairly low monthly instalments with low-interest rates. You can look into them online to find out more about how they work. Remember there are other ways to build your credit as well.

Debt consolidation/refinancing

Debt consolidation or refinancing can be a form of good debt too. Such debt typically aims to make your current debts more manageable so that you can more easily pay them off. That said, it does depend very much on the lender you choose.

Refinancing typically involves taking out a low-interest loan to pay off a high-interest loan. This allows you to reduce your monthly interest rates and pay less in the long run. Just be wary when paying off existing loans that there are no hidden expensive early repayment charges. 

Consolidation loans are a type of refinancing that involves taking out a single large loan to pay off multiple debts. This can make your debts easier to track – instead of keeping track of multiple different repayments on different dates, you can focus on one single repayment. In order for a consolidation loan to be financially worthwhile, make sure that it has a low-interest rate, otherwise, you could pay more in the long run. It’s a good idea to spend some time shopping around to see what deals are out there.

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