Debt

When Can Debt be a Good Thing?

There are some of us that fear debt. We feel that it is a terrible thing and that we should never borrow money from anyone. There is even and old phrase ‘never a borrower or a lender be’. However, there are circumstances when debt can actually be a good thing. This may be hard to comprehend for some people as it does tend to come surrounded by such negativity but it can be extremely useful if used carefully.

Some debt can actually help us to improve our lives and have a more positive future. It does have to be dealt with carefully though. Examples of good debt are things like mortgages, student loans and some business loans. Anything that will improve your future could be considered to be a good debt. So if you have a mortgage, you will no longer need to pay rent and a mortgage is often cheaper. You will end up owning a property that is most likely to increase in value and you will either be able to sell it and have the money should you need it or you will have something to pass on when you no longer need it. With a student loan you will be investing in an education which you will then use to get a better paid job, which will help you to have more earning potential and hopefully be happier in your career. You also will only have to make loan repayments when you are earning enough money and it is written off after thirty years if it has not all been repaid. With a business loan, you may find that you need to have some money so that you can grow your business. It might be that you want more stock, bigger premises, better marketing and advertising or something like that, but if it is a wise investment it could lead to the business becoming much more profitable and more than making enough to cover the loan repayments and make more profit.

There are risks with all types of loans, even good ones. There is no guarantee that a house value will go up, that the government will not change the rules on student loans or that a business will do well after an investment of capital. However, if you assess the risks before taking out the loan then you can minimise the chance of things going wring. Think about the future and what you expect to happen and the consequences of this. Of course, no one has a crystal ball, but you should still be able to make some assumptions and have a think about what you think may happen to you, the economy, the markets etc. Looking at what has happened in the past can be a good start to predicting what might happen in the future and you may find articles and books which could help you as well.

It is also really important to think about how you will manage the repayments. Once you borrow money you will be committed to making repayments until the debt is clear and this is something that you will have to budget for. If you are already renting a home, then you will be used to paying out each month and once you take on a mortgage you may find that you will be paying less. Student loan repayments are taken out of your tax code and are means tested so you should be able to afford them without too much worry. A business loan will hopefully be able to be repaid form the business profits, but it may take time even after an injection in cash, for profits to increase and so you will need to be sure that you can cover them. It also may be easy to think that you will manage in the short term, but you need to think about the future as well. If your circumstances change you may find it much more difficult to cope with the repayments. You will need to consider whether you might want to take out insurance to cover you in this situation or whether you feel that you can have enough savings to give yourself an emergency fund.

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