Debt is the kind of word that induces unease and worry, but that doesn’t have to be the case all the time, nor a reason to avoid thinking about it. Debt can be good as well as bad, and it is how you manage your debt that is important; the key is knowing how.
There are 3 questions you need to ask before you even consider taking on any debt:
What’s the Difference Between Good and Bad Debt?
Good debt can be summed up as necessary, good value and easily within your financial limits. This kind of debt gets you what you need but can’t afford right now without pushing you beyond your capabilities. The best example is a student loan, but you might also consider a mortgage or car financing if you need a vehicle to get to work. Take a look at https://www.bordercityautos.co.uk/finance.php for more information.
Bad debt is pretty much the opposite in that it is debt you don’t need and can’t afford. Taking out a payday loan to finance a holiday is a perfect example of getting into unnecessary debt that will quickly spiral out of control. Bad debt may also impact your credit rating, especially if you fail to make repayments on time. Getting out of debt with bad credit is tough which is why you should always make sure that you can afford your debt before you accept it.
Can You Afford Your Debt?
While it can be tempting to push right up against your financial limits, you must resist. You must be able to make every repayment on time and if you can’t do this comfortably, you may struggle in the future.
Drawing up a budget that includes all your expenses will help you to work out how much spare cash you have each month. It might seem contradictory, but you need to have spare funds in order to be able to afford a debt – this is how you will repay it. However, you might also consider that if you are taking on a debt to avoid another monthly cost, you may have a little more flexibility.
Can You Avoid Debt?
Naturally, the best option for most things is to try and avoid debt. If you can save up for something and wait, you absolutely should. The best ways to save are to reduce your current costs, automate your savings and find ways to earn a little extra on the side.
If you can’t save up in time, it might be worth investigating other forms of funding. For example, crowdfunding has become an ever more popular way for people to access funds, particularly for charitable causes or business startups.
If you absolutely need to take on debt, you should always thing carefully about the best form of debt and make sure that it is an affordable option for you. Looking into 0% credit cards is one option but you may also be able to remortgage if you are a homeowner. If you are in any doubt, you should speak to an independent financial advisor to see which options are available to you.
