Is there such a thing as a good debt?
11 May 2023
While debt is often seen in negative terms there can be times in life when it is not only a necessity but can lead to a better financial position. That is if is done in the right way.
Broadly speaking some debts can be termed as ‘good’. These are ones where the outlay either brings a financial return or improves your earning potential.
Of course, some forethought is needed in taking on debt. If borrowing over a long-time, consideration should be given to the possible impact of rising interest rates and the affordability of payments.
Diligence is also needed when looking at the terms and conditions of a loan or finance agreement.
Buying a house
Despite rising interest rates and repayments, taking out a mortgage to buy a house still makes good sense in the long term.
Once adjusting for inflation, the average 1972 house price of £5,158 still amounts to a very affordable £49,333 by modern standards.
Today, however, the average UK homebuyer is paying out £278,436 on a property.
That’s a total increase of 464 per cent, with house prices climbing by an average of 9.3 per cent, or £4,582, every single year over the past 50 years.
Generally speaking, house prices have been rising for many decades now. While there may be peaks and troughs in the manner in which prices rise and fall, the overall trend is up.
Additionally, going into debt to purchase a house provides a stable place for you to live whilst giving you a solid asset that rises in price overall.
In fact, mortgage repayments are rising at a far slower rate than the average rent in the UK, which means that you could be financially better off in the long run by choosing to own a home.
As well as purchasing your own home it is also worth considering the purchase of buy-to-let properties if you have the means to invest.
Getting an Education
Investing in higher education can also pay possible long-term dividends, despite the cost of going to university from student loans.
This risk is also offset by the fact that those who took them out only have to pay them back once they reach a certain earnings threshold.
The Department for Education produced a report in 2018 that said that graduates on average earned £10,000 per year more than those that don’t go to university.
If we assume that graduates enter work at 21 and non-graduates at 18, with both retiring when they turn 65, this amounts to a lifetime earnings gap of £321,000.
What’s more, student loans aren’t treated like normal debts. With payments only made if you earn above the threshold and with the debt written off entirely after several decades. In many ways, student loans act more like a tax on earnings than a normal loan. Bailiffs will not come knocking on your door if you cannot pay.
Starting a business
While starting a new business can have inherent risks it should not put you off from going into debt to make your vision a reality.
If successful, it can prove a lucrative investment in the long term.
Launching your own business can also give you more freedom and control over your working life.
Debts from starting a business carry more risks than the other loans outlined above, especially as many companies fail within their first five years.
However, if you take out sensible finance to support your business it can pay off.
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