Some people like to class debt as either good and bad and they might put certain loan types into different categories. However, good and bad debt can be quite complex and it is not easy to just allocate a certain type of loan into a certain category. Therefore, it can be easier to get a good understanding of what good debt and bad debts are and then you will be able to work it out for yourself.
What is a good debt?
A good debt is when you borrow money for a purpose that will aid you in the future. For example, if you take out a mortgage so that you can buy a home which will enable you to save a lot of money on rent. A student loan is often also put into this category as it will enable you to study to get a job that is better paid so you will make back more than you have paid out on the loan.
It is not always so easy to categorise loans though. It will depend on your own personal circumstance. If you are using the loan to better yourself in some way, to pay for something that will allow you to save money in the long run or something like that then it is normally considered to be good debt. However, you also need to make sure that you choose the right sort of loan for the purpose that you need it for and that you compare lenders to make sure that you pick the one that will offer you good value for money. You also need to make sure that you will be able to afford the repayments.
What is a bad debt?
So simply a bad debt is anything which does not fit the criteria above. So, if you are borrowing money to pay for luxury items that you do not really need and may hardly even use then this would be considered to be bad debt. You may also have chosen the wrong loan type, perhaps borrowing more money than you need or using a loan type that is unnecessarily expensive. Then if you have chosen a loan where you cannot afford the repayments then you will also be considered to have bad debt.
As you can see it will depend on your personal circumstances whether a debt is considered bad or good for you. For example, if two people want to buy the same house and take a mortgage then this could be considered to be good debt for them both. However, if one of them cannot afford the repayments then this will be a bad debt for them and they should have looked to borrowing less by buying a cheaper home.
How do I categorise payday loans?
Categorising payday loans is not simple. Some people might immediately say that they are bad debt because they have had a lot of negative press. However, as explained above it will very much depend on your personal circumstances. Firstly, payday loans are designed to be used in emergencies when you need money quickly and they can be arranged very quickly. This means that if you are in this situation then they might be a good choice. However, they are also designed for those with a poor credit record. If you do have a good credit record then it might be that there are other loans which you could take out which might be cheaper for you. If you do have a poor credit record then they could be the right choice for you. You also need to compare different payday lenders so that you are sure that you are taking out the one that is best for you with regards to the price and other factors. One of the most important determinants of whether it is good or bad debt for you is how well you are able to repay it. A payday loan normally has just one repayment. This is a lump sum which includes what you have borrowed and the lenders charges. You should be able to find out how much this will be before you take out the loan and you will then be able to decide whether that is an amount that you will be able to afford. The lender will ask you to set up a direct debit in your bank account for the payment to go out when you get paid. This means that you should have the money available in your bank account in order to cover the cost of the loan. However, you still need to think about whether you will have enough money left to pay all of your other bills for the rest of the month. This can be quite tricky as we are not used to having a large lump sum go out of our bank account in a month. So, make sure that you do some calculations to check this.