Good debt vs. bad debt

Just about everyone will have to borrow money at some stage of their lives. Most wishing to own their own property will borrow on a mortgage but even those looking to acquire a car may take out a personal loan or lease plan.

Sometimes there are great deals around that are hard to decline. Take, for example, many of the low cost credit deals offered by car manufacturers.

These are a great way to get a new car at very affordable rates of interest.

Deals like this can be classed as ‘good debt’ since they are amongst the lowest cost way to borrow one can find. Especially if you already have the cash available where you can invest in a high interest savings account and make more on the interest than you lose on the loan charge!

The key with any form of debt is making sure that the payments remain affordable even if personal circumstances change. That means if the hours available to work are reduced and the net family income drops, the payments are still affordable for at least six months.

Easy credit is now a thing of the past. The number of providers has reduced dramatically since the early ‘noughties’ and those that are in the market are looking for good quality customers.

That means borrowing whilst your credit history is in tip top condition and you have a provable source of income. Without either of these, the rates and terms on offer may be less attractive.

So, good debt can be defined as debt that is affordable and comfortably repayable within the available family income.

But circumstances in these uncertain times can change fast meaning that what was once affordable now becomes unaffordable.

When debt gets out of control it eats away at family life and relationships. Cutting spending and making savings can generate some spare income each month but more extensive action may be needed if payments are higher than free income.

If there are just one or two lenders (for example a mortgage loan and car loan) then it should be easy to speak with them and try to arrange a reschedule of the payments over a longer period of time.

Provided you are up to date with the payments then most lenders will listen sympathetically to a request for changed payments provided the proposal is sensible.

Even if you have started to miss a few payments, it should be possible to get a payment plan agreed that allows the family to live on a day to day basis without the fear of repossession or legal action.

If there are a number of debts and it is not clear how to move forward, it can pay to enlist the help of a specialist debt management company. As they deal with lenders every day and know what will be acceptable, they can help drive the best deals to get you back on track.

It may be worthwhile paying a small fee to have help sorting out your finances rather than struggling on and getting into a worse mess.

There are also a few good debt management websites that can help shed light on what is available to those with debt problems. You can read more for help on sorting out your debt problems at moneysupermarket.

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