The phrase “Is debt a bad thing?” generally stirs an interesting reaction. Some, naturally are inclined to shriek “Yes!” as the merest hint of debt causes their stomachs to seize up with nervous fear along with a mental image of heavy cast iron shackles pinning them down. And with 2008 so recent in everyone’s subconscious, this is fully understandable.
However, as a financial adviser, I get to see all sorts of clients in all sorts of situations and sometimes debt, if managed properly, can be a very positive financial planning tool and can, if sensibly used, improve people’s lives.
One example that comes to mind is the dreaded Student Loan. The newspapers tend to be filled with students (or interestingly parents) complaining about how they are “burdened” and “saddled” with debt. Other visually-loaded phrases are used by those who leave university. However, if you want to go to university to improve your career prospects and your parents cannot or will not pay for you, then a Student Loan could be a very sensible debt to take on. The benefits of a loan are that it should improve your earnings potential in the future, the payments are restricted until you are earning a certain amount, plus the balance is potentially written off if you have not fully repaid it in 25 years. With the potential to significantly improve your standing in life, it sounds like a pretty good deal to me.
A mortgage is another debt which we all know gives you a chance to not only get on the housing ladder, but increase the quality of your property in the future. With rates low at present and the market still very competitive, there are some of the lowest ever mortgage rates available. Now, it will not always be like this, but this could be a great time to lock in a lower rate if you have not already done so.
The flip side of this debt discussion is credit card debt. Useful for liquidity, yes – however the downsides and risks of credit card debt are well documented and rightly so. When you’re paying 29.9% interest, it’s no wonder people can get themselves in a horrible cycle of only just being able to afford the interest. This is to be avoided at all costs.
The issue of debt is a very personal subject and clearly, advice will be different for people depending on their circumstances and stage of life. If you want to understand what options are available to you, speaking with a financial adviser can provide you with professional guidance when it comes to managing debt.
Article by Adam Walkom