“Never a lender, nor a borrower, be” – wise words from Will Shakespeare which may have been relevant in his time, but in this day and age it’s almost impossible not to go into debt at some point in your life… unless, of course, you’ve mastered the art of alchemy!
Managing Your Debt
Not all debt is bad or unmanageable, but the key to surviving a swim with the sharks in the current sea of credit cards, loans and payday lenders, is knowing which arrangements are a sensible, calculated risk and which ones to avoid like the plague in order to manage your debts effectively.
So, What Is Debt?
Technically speaking, you’re in debt anytime you borrow money from someone, right up until the moment you pay it off, including any interest owed.
And What Is Interest?
This is the additional amount you agree to pay in order to borrow the money. Typically, longer term loans offer lower interest rates, whereas shorter term loans can get away with exceptionally high rates.
Interest is usually expressed in terms of APR (Annual Percentage Rate) which takes into account the compound interest rate plus any other fixed charges connected to the loan.
But this APR only needs to be offered to 51% of successful applicants which could mean that you end up on a very different rate to the one actually advertised.
Currently, you could be looking at a personal loan with an APR of 4-8%, a credit card at 20-40% and a payday loan of 1220% – even if maths is your nemesis, hopefully you can see that the payday loan is the significantly more expensive option.
If you are ever in doubt as to whether or not a particular deal is good, consult moneysupermarket.com as a point of reference – they can help compare similar products to make sure you get the best deal.
Is All Debt Bad, Or When, If Ever, Can It Be Good?
Being in a debt has become a bit of a dirty word since the influx of less-than-reputable lenders, but there are plenty of times when it’s ok to go into debt, particularly if it’s enables a means to an end.
If there is a sound, logical argument which improves your overall position in the long run, then debt can be considered to be a calculated risk which is worthwhile.
Prime examples of this would be a mortgage or a student loan: most people can’t afford to buy a house outright, or fund several years of university tuition, but the end result – getting on the property ladder or achieving a qualification – means the debt is justified as you will ultimately be bettering your position.
Acceptable debt isn’t just confined to such big, life changing purchases: if your car breaks down and you don’t have enough money to get it fixed, but you need it to get to work, then putting the bill on a credit card or dipping into your overdraft would make sense.
Likewise, if you are investing in yourself by studying i.e. taking a student loan or investing in a piece of kit to help you earn more money – such as a laptop or electric tools – will pay off in the long run.
These are easy examples of when going into debt is worthwhile, but you’re likely to face less obvious choices on a regular basis.
Most of us can make a convincing argument for buying something we covet even if we can’t really afford it, but the best way to establish whether or not the debt is worthwhile, is to think about its use over the length of the borrowing.
1. If you’re talking a couple of hundred pounds for new suit to wear to job interviews, which can be paid off within 6 months, without incurring much interest, and which will ultimately secure you a better, higher paid job. Then it could be a cost effective investment, as you will wear the suit for years to come and it will have paid for itself.
2. If, on the other hand, you are on a shopping spree and fancy some make up, a couple of high street tops and a pair of fashion heels for a night out, then the items are likely to be used or discarded within a few months, long before you’ve paid for them, let alone the high interest on a store card, and so this would be considered an unwise investment.
Over To You
Throughout the debt management series of articles, we will look at the various types of borrowing, alongside the good, the bad and the ugly lenders, but first you need to identify all your sources of debt as you learn how to manage your debts better.
Do you have credit cards, store cards, car finance, interest-free credit on furniture, a personal loan or a mortgage? Do you regularly dip into your overdraft, borrow off friends and family, or take short payday loans?
Do you have a travel loan from work, have an attachment of earnings order or student loans deduction? In order to tackle and manage your debt head on, you have to be brutally honest with yourself and acknowledge every penny you owe, in every form.
Only once you have a handle on your level of borrowing, can you work on managing your debt effectively. So, grab a cup of coffee while you sit down and work it all out, then browse through our helpful articles to plan your next steps.
In the coming weeks, we will be looking at different aspect of debts so be sure to sign up so you can keep up with the latest articles of the series.