Debt – The Good, The Bad and The Ugly

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GETTING out of debt is the No1 priority for anyone who wants to sort out their bank balance and put themselves on the path to a richer future.

Owing money shackles you into a life of living hand to mouth, month to month. But debt comes in many forms and some are far worse than others…

THE UGLY

Payday loans

These are so ugly they make Frankenstein’s monster look like Brad Pitt. Some charge poor people over 1,500% annual interest. Yes, you read that right, 1,500%.

The rate is so horrendous they even try to disguise it on their radio ads by saying “just one five zero zero per cent”.

Please don’t be fooled. Take out a “short-term” loan like this and you’ll soon find yourself drowning in debt with the lenders pulling your legs under water.

If you’ve already got one of these, pay if off before any other debts. This monster has to die.

THE BAD

Credit cards

It’s so easy to buy stuff on credit and we’re programmed by society to think that it’s totally normal and acceptable. Except it isn’t.

Firstly, you probably don’t need most of the “stuff” that you’ve just bought. I’m talking about the consumerist crap that people love to gorge on – gadgets, designer labels, etc – not buying food for your child.

Secondly, if you can’t afford it at the time and need to use a credit card, you’re just asking for trouble. Some of these charge up to 40% annual interest. Even one of the lowest at 16% can squeeze you dry.

Yes, if you pay the full balance at the end of each month, there’s no charge. But what if you have a bad few weeks and get behind? Then the problems begin and the credit card companies will be rubbing their hands with glee.

Plus, your credit history will be destroyed and this could lead to all kinds of headaches in the future.

Pay these off next and then cut up your cards.

Bank loans, car loans etc

These start at around 4% annual interest but after that the sky’s the limit.

My bank used to phone me all the time, trying to “offer” me one of their loans – as if they were doing me a favour. I politely but firmly told them where to go.

Personal loans are just another example of the debt trap. Get rid of even the low interest ones.

THE GOOD

Mortgages

Now when I say “good” I mean the lesser of the above evils. For most it is a necessary evil too.

The good thing about a mortgage is it allows you to own your home. A house is an important asset in your financial life and gives you stability as well as a roof over your head.

Don’t take out too big a mortgage, overextending yourself by buying a large expensive property you don’t need. But if you can secure a interest rate fixed for a few years (mine is 2.7% until 2018) you’ll know how much you can afford and have more peace of mind.

Even though mortgages might be cheap at the moment, I wouldn’t take out additional loans to fund a buy-to-let empire…but that’s an article for another day.
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WHAT do you think? Any stories about debt you’d like to share? Please get in touch below.

Simon Saves

I'm a national newspaper journalist for hire who has a passion for personal finance. Currently saving and investing towards my first million. All comments welcome.Follow me on Twitter: @MyRichFuturecom

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2 Responses

  1. weenie says:

    In August, I will finally pay off my car – just a £3k ‘balloon’ payment to make and then the car will be owned by me – yay! I have planned for this so have the £3k sitting in a savings account.

    In the past, I would celebrate the fact that I no longer had monthly car loan payments by just spending the extra money in my bank account. This time, I will be specifically allocating the money, most of it into investments (to push up my savings rate) but also, as my car will now be out of warranty and older, I’ll be putting some towards a ‘car maintenance’ fund – during my dark old days of being in debt, I used to just put those pesky repairs on my credit card – not any more!

  2. Simon, Editor in Chief says:

    Hi Weenie. That’s definitely the right thing to do. By investing the extra money instead of just spending it, that cash will begin to work for you. The maintenance fund is also a good idea. You might need it, you might not. But better safe than sorry.

    Thanks for your comment.

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