Dealing With Debt

“Beware of little expenses, a small leak will sink a great ship” – Benjamin Franklin

Account Stock photos by Vecteezy

Debt tends to get a negative reputation, but what if we were to tell you that debt can also be a good thing? Getting to grips with how debt works, its various uses, and how to avoid bad debts (like bankruptcy!) is an essential skill that will come in handy later down the line!

WHAT IS DEBT?

Debt, simply put, is something that one party owes another, and this is usually money. Common examples of debt include mortgages, car loans, and credit cards. For those of you who want to go to university, a student loan may be your first experience with debts, so it is important to understand how it works!

GOOD VS BAD DEBT:

Good debts are those that someone is well-informed about and can pay for within their budget, for example a student loan. On the other hand, bad debts arise when loans or outstanding balances cannot be repaid and are written off. Bad debts often lead to people finding themselves in troubling financial situations, such as bankruptcy.

MORE ON STUDENT LOAN DEBTS:

Despite coming in different forms, student loans serve the purpose of financing your further education. Loan repayments are deducted from your income by your employer, and after 40 years, if it has not been repaid, then it will be written off and the payments will stop.

HOW TO MANAGE YOUR DEBTS:

As long as you keep on top of the various forms of debt that you may be managing, you won’t have to worry about the various threats that may be lurking (such as bankruptcy!). Consolidating loans involves taking out a new, single loan, that combines your various existing debts, resulting in lower interest rates and monthly payments.

A debt-to-income ratio measures the percentage of a persons’ monthly income that goes towards their debt payments. A rate of 36% tends to be the highest rates in which lenders seek, so it would be advisable to reorganise your budget if your ratio was any higher than this!