How Good Debt Can Turn into Bad Debt

How Good Debt Can Turn into Bad Debt

Sometimes, the line between good and bad debt can be blurry. A house can seem like a great investment. After all, it’s an appreciating asset; however, what do you do when your bond repayments become the bane of your existence and you wish you had just stuck to renting? Perhaps getting your education might have seemed like the ideal investment into your future, but what happens when you graduate with no experience and the job market is saturated?

Good and Bad Debt

Usually, we define good debt as an investment that will appreciate over time. For instance, mortgages can turn into equity, student loans can open doors to higher-paying jobs, business capital loans can grow wealth, and car finance provides transport. Good debt like this can easily turn into bad debt if we don’t properly plan repayments or can’t afford them.

While the term bad debt is subjective, most people think of it as overwhelming debt that eats away at disposable income and puts you at risk for legal action and asset repossession. Debt like this is often referred to as over-indebtedness and can have grave consequences on your financial health.

Let’s discuss how good debt can turn into bad debt and what you can do about it.

How Good Debt Can Turn into Bad Debt

Good debt can turn into bad debt if you don’t properly budget for it, take on debt you can’t afford, inflation rises, your interest rate increases, or you live above your means.

It Doesn’t Fit into Your Budget

If you take out debt that you haven’t properly budgeted for, things can turn ugly quickly. You might find yourself skipping out on essentials to budget for debt repayments or missing payments, putting your account into arrears and lowering your credit score because you’re paying off debt with no money. Don’t take on debt you can’t afford. Good lenders will conduct an affordability assessment before lending you money.

Inflation Rises

It’s not only debt that can affect you financially. When inflation rises, the purchasing power of the rand goes down, making food, petrol, electricity and other essentials more expensive. This can severely impact your budget and how you’re able to make dent repayments. If your income doesn’t keep up with inflation, the cost of your debt can increase, too, making it turn ugly.

Interest Increases

If your lender increases the interest rate you have to pay on your loan because of an increase in the repo rate or prime lending rate, debt repayments quickly become unaffordable.

Living Above Your Means

Even if you can afford your loan, living above your means (eating out when you shouldn’t, buying clothes you can’t afford, etc.) can make good debt turn bad. Make sure you’re living within your means, and bad debt can turn into good debt again.

What to Do If Your Debt Is Bad Debt

If you can’t afford to make minimum payments or afford living expenses, you may be overindebted: a key sign of debt review. You can break out of over-indebtedness with a debt help system called debt review.

Debt review is a legal process wherein a debt counsellor negotiates lower debt repayments and interest rates, legal protection, and protection from asset repossession with your creditor on your behalf.

How good debt turns to bad debt

Live debt-free and turn bad debt into good debt–contact Debtco Group.

Stop Struggling

and take the first step to financial freedom