According to Money Advice Service, borrowing money can be classified as either good or bad debt. The following examples should assist in determining the difference:

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Good Debt

In essence, good debt is defined as any borrowing that enables the borrower to improve his or her prospects or increase their income in the long run. Here are a few examples of good debt.

Example 1

– Peter is studying to become a doctor. Like many other students, he has to take out a student loan in order to cover his expenses while at university. The money he borrows is classed as a good debt, because once he is qualified, his prospects are considerably improved.

Example 2

– Sonia has been offered a job with much better pay than her current occupation. Unfortunately, it is at quite a distance from her home and there is no public transport available to get here there. She subsequently takes out a loan to purchase a car. As the car enables her to take a job that will significantly increase, this loan is considered to be a good debt.

Example 3

Mary and Mike take out a mortgage to purchase a new home and will be in debt for the 5 year mortgage term. However, they will be able to sell the property at a higher price if it increases in value and this will be a good investment.

Bad Debt

Bad debts basically consist of loans taken out to fund expensive holidays, luxury items or anything else that ultimately provides the borrower with no feasible return at all.

Example 1

Jennifer has long dreamt of taking a Caribbean cruise. Unable to raise the necessary funds any other way, she takes out a loan to cover the cost for this trip. While she has the time of her life on the cruise, she is ultimately left with nothing but a few photos, memories and a large loan to repay. This makes this kind of borrowing a bad debt.

Example 2

Jonathan has a perfectly good, but old car. Determined to impress friends, neighbours and colleagues, he takes out a loan to splash out on a brand new vehicle. This purchase was essentially unnecessary, making the loan a bad debt.

The Moral of The Story

These examples highlight the fact that the question whether a purchase is really necessary should be the first thing to be considered before taking out any kind of loan. It is also imperative to ensure that you can afford to make the repayments on your loan, because even a good debt can turn bad if you default on your payments.

Considering these two factors before taking out a loan is vital regardless of whether you want to take out a long term loan to purchase a car to get you to work or a payday loan to get your washing machine fixed.

Since we specialise in payday and short term products, we stress that these are used for genuine emergency purposes and not to fund a lavish lifestyle. Before applying, you must always think about how you are going to be able to repay and have a plan in mind. We will always carry out a series of checks to ensure that you can afford to repay your loan without falling into financial difficulty.

Get Useful Advice

Uncle Buck advisors can help you to make the right decision whether to take out a loan and, if so, which type of loan will be most suitable for your requirements. Contact them for expert advice by calling Tel.: 01959 543 400 (Call charges may vary depending on your phone provider. Calls may be monitored for security and/or training purposes).

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