Are you facing a situation where you’re looking to borrow money but don’t know much about debt?
If so, you’ve come to the right place.
I’ve compiled a comprehensive guide on personal debt, personal loans, personal finance, monthly payments, and interest rates on personal debt to educate you about all there is to know about this topic.
What is Considered Personal Debt?
Personal debt is basically money owed by an individual to another individual or household instead of debt owed amongst businesses or the government.
In that sense, it carries a connotation of individual responsibility. When people take a personal loan, it is considered a personal debt that they have to repay to their creditors.
Also, these loans are generally much smaller than business loans and the people who take these loans are often facing severe financial difficulties.
Small Business Loans
Small business loans are generally seen as business loans, but they do carry an element of personal debt since the borrower is usually one person or a group of people that are responsible for paying the debt if the organization ever goes bankrupt.
Keep that in mind the next time you take a small business loan. Since the businesses involved are often very small, these debts are considered personal debts.
Student loans are one of the major types of debt.
These loans are usually considered good debt because for most people, investing in education is a useful expenditure.
It is empirically known that college graduates earn more than non-graduates, on average. Also, the interest rate on student debt is pretty low, which means they are a pretty good long term investment.
Lastly, you only have to start repaying these debts once you graduate and you start earning more than a certain amount.
Education and a formal degree pay off in the long run, which means that if you’ve carefully analysed all the details, borrow that student loan and don’t compromise on your education.
Credit Card Debt
If you own a credit card, this section is pretty important for you. On credit cards, personal loans can be very damaging to your credit rating and financial image.
For one, credit card debt comes with massive interest. Also, if you can’t pay your debts on time, you’re likely to face incredibly high interest rates on future debts.
Not only are credit cards very confusing, but they also involve hidden costs and a ton of financial baggage. They’re a prime example of bad personal debt.
To put it simply, payday loans, as the name implies, are meant to be repaid on a person’s next payday.
As per usual norm, these are two week long debts that are repaid once you receive your salary.
These loans are small but repaying these debts can become quite bothersome, as they come with very high interest.
Home Equity Loans
A home equity loan is one where the borrowing party borrows money against the equity of their house, or with their house as collateral.
These are usually very large debts, and are very risky as well, since if you can’t repay them, you run the risk of losing your house. That’s a risk not many are willing to take for a debt.
An auto loan is bad debt in most circumstances.
As a general statement, it’s a bad idea to be taking on debt for a new vehicle, especially when you’re living pay cheque-to-pay cheque and simply don’t have the money to be adding to your level of debt.
If the interest rate is low and you have the revenue to pay off your debt quickly, car loans may be considered good debts, but if you keep missing payments and the car’s value declines quickly, it’s a bad idea for most people.
If the personal debt you owe is a mortgage, you usually have good debt to repay.
Investing in a mortgage is a pretty good decision, since you need a place to live and property prices are rising rapidly.
Also, when you take a loan for a mortgage, the house you get is the collateral. That means if you can’t keep paying, the house is taken from you.
Is All Personal Debt Bad?
This question doesn’t have a yes/no answer. For most people in the UK, whether personal debt is good or bad depends on what they’re using it for.
We’ve already outlined how certain types of debt allow you to increase your earning potential, or increase in value over time, such as student loans and mortgages.
On the contrary, some personal loans, such as short term splurges, automobiles, and credit cards harm your financial situation and decrease your net worth, so they’re definitely considered bad in the UK.
The most suitable answer, therefore, is that no, all personal debt is not bad, but it can be if you choose and spend carelessly.
How to Manage Personal Debt?
Budgeting (Mindful Spending)
The first step you should absolutely adopt is to make a proper budget and stick to it.
One way to do this is to analyse your latest bank statement and figure out where your money is going. Then cut back in those areas as much as possible.
Keep updating your budget regularly and opt for cheaper alternatives to products you buy.
Pay More on Credit Cards
One mistake a lot of people in the UK make when paying for their credit cards is to just pay the minimum payment required each month and nothing else.
This hurts them in the long run because if the payments keep piling on, the interest rate makes it more and more difficult to pay back the full amount in time.
So when you have some extra cash with you, consider paying more on your credit card each month rather than using it somewhere else.
Pay Bills On Time
Always pay your bills on time to ensure that you don’t incur any extra charges. More than a million people in the UK have faced problems owing to late bill payments at least once.
If you keep forgetting to pay your bills on time, you may want to set up automatic monthly payments so you don’t have to pay manually.
Have an Emergency Fund to Fall Back On
Life can be very unpredictable, which is why you need an emergency cash supply at all times. Even when you’re earning steadily, you’re one major setback away from financial disaster.
That’s why you always need to maintain an emergency fund that you only ever withdraw from when you’re facing a crisis or an emergency.
Watch Your Bank Account
We can all fall into the trap of withdrawing too much and depositing too little.
You can utilize online banking apps and other money based apps to monitor your finances and make sure that you’re not spending too much.
How much credit card debt is too much?
There are a few signs that tell you if your credit card debt is too much, such as if you’re using cards to pay off other cards, if your debt-to-income ratio is high, if you’re always making minimum payments on your debt, or if you’re maxing out your cards.
What is the average personal debt in the UK?
The total unsecured debt is around £4,264 per adult. This is rather alarming, considering the UK only has around 66 million people.
How long before debt is written off in the UK?
For most types of UK debts, the limitation period is six years, after which you won’t likely be chased by collection agencies for it. This includes payday loans, personal loans, credit cards, and some other types of loans.
Which country has the highest debt?
Personal debt can be a confusing topic for many. However, that doesn’t mean you can’t keep learning more about it along the way.
I hope this guide helped you in more ways than one. Got questions? Drop them down below and I’ll get to them ASAP.