Understanding the types of debt that how they can affect you is important, read on to find out more.
Types of Debt - When Is Debt a Bad Thing?
Debt is often thought of as something negative. This isn’t always the case, manageable debt can help boost your credit score and spread the cost of both essential and non-essential purchases. However, when debt becomes unmanageable, some debts are more important than others when it comes to repayment. We’ve broken down the main types of debt, explained the positive and negative aspects and how you can keep them under control.
When Debt Becomes “Problem Debt”
Although borrowing money can often be a great way to take the next step in your life, debt can also become unmanageable and turn into “problem debt”.
While you may have taken on the debt with every means and intention of paying it back, what was once manageable debt can get out of your control following a change of personal circumstances, such as:
- Unexpected costs such as a car breaking down or home repairs
- Hours of work being reduced or becoming unemployed
- Sudden illness
Before borrowing money, it is important to consider the following:
- The repayment amount
Is the total amount and monthly repayment amount within your budget? Is it a payment amount that you can repay without cutting short in other areas?
- The interest rate
Interest rates can vary in many different ways, from the lender to your circumstances. You must take the total amount borrowed into account, including the interest rate.
- The repayment term
It is often tempting to borrow money over a long period to make the monthly payments smaller. But you must consider that if the repayment term is longer, you may end up paying more over time. Additionally, your circumstances could change making it difficult to repay your debt.
- Late payment penalties
Some creditors may be lenient on late payments but others can charge a fee for each late or missed payment. This can cause the debt to quickly grow and become unmanageable.