Debt is a word with many negative connotations, but being in debt isn’t necessarily a curse word.
Many people have to take manageable debts in order to make big steps in life. A good example would be a mortgage.
Debt only becomes problematic when repayments cannot be managed. This doesn’t necessarily make them irresponsible workers.
▪️ Unemployment or underemployment
▪️ Illness leading to loss of work
▪️ Unexpected new costs such as essential home repairs
It’s worth noting that the coronavirus itself has been a massive spanner in the works for people who felt that they had manageable debts, and we have highlighted that in another article.
Types of debt
Credit cards, loans, store cards and outstanding tax payments are all different facets of debt. There are multiple forms of debt but they can all be split into two separate categories: secured and unsecured debt.
These are debts that are taken out against an asset. A common type of secured debt would be a mortgage; the bank secures that debt against the house that you choose to buy. However, this doesn’t mean that such a maneuver is risk-free.
If you are unable to pay your mortgage then your bank could repossess your home to recover the debt. The same principles apply for a secure car loan.
Debts that require a guarantor can also be viewed as secure. While they do not have security against any of your assets, the lender can go to the guarantor for payment if they are unable to service the debt.
These debts are not taken out against an asset and they are not covered by a guarantor. A good example of this would be credit card debt.
The creditor can’t force a repossession on the debtor, even if they can’t pay back the debt. However, your credit score can still suffer if you fail to make any repayments, and there can be other problems later down the line.
Manageable and unmanageable debt
Many people will not take on a debt if they know that they cannot pay it back. Unfortunately, situations change for many people and that can make debts become less manageable than people initially thought.
Debts might look small but, in reality, some debts can be much harder to pay back than they seem. There are four key things to consider whenever you want to borrow some money:
- Interest rate – A higher interest rate means that you will have to pay more money back. This can affect the timeframe of the active debt.
- Repayment amount: The money that you agree to pay back, usually per-month. This can increase based on interest.
- Repayment term: The timeframe with which you agree to pay off your debts.
- Late payment penalties: This depends on the leniency of the lenders. Stricter operators may leave high charges on clients who fail to meet payment guidelines.
Prioritising your debt
It’s important to prioritise debts if you have to pay back several creditors. It is advised to prioritise secured debts, however, if all of your debts are unsecured then it’s probably best to think about which debts will cost you the most if you miss the repayments.