Debt can be such a horrible word to some people. It is linked to all different types of debt, regardless of whether it is good or bad.
You may have already reached that time, but nearly everybody will have to borrow money at some point during their lives. Whether it is paying for children’s education, buying your own home or getting a new car, borrowing money is just something that needs to happen from time to time.
Unfortunately, some people do not know when to stop. They carry on borrowing and borrowing, digging themselves into a deeper hole of debt. It can just spiral out of control and debt can get out of hand.
Financial experts say that your debt payments, which can include your mortgage as well as other debt, should not make up more than 36 percent of your gross monthly income. That will leave a very respectable 64 percent of your income spare on other things, such as household bills, food shopping and ‘fun’ stuff.
However, not all people stick to this limit. According to the website, creditcards.com, the average credit card debt per household in the United States of America stood at over $15,000. For most households, this is just too much debt and families struggle to pay it off and turn to consolidated debt arrangements for help and assistance.
These figures are not meant to scare people into avoiding debt at all costs. The challenge to households across the US is to ensure that any debt that they have to take is sensibly managed and repaid.
Debt managed in this way can be classed as a good debt. If you borrow a small amount, and ensure that it is paid off within the agreed time period, it can be a deemed a good date.
Good debt is not just a small amount of debt that can be paid off over an agreed period of time. Good debt can be the biggest financial commitment that you make.
Here are some wonderful examples of good debt:
Only the super-rich will be able to afford the luxury of buying their home with cold, hard cash. For the rest of us, obtaining a mortgage is the only realistic way people can afford to buy their own home.
There are a few considerations that you need to think carefully about before you apply for a mortgage. One, how much can you realistically afford to put down as a deposit and secondly, how much of a mortgage amount do you need to borrow. The calculation is simple; the less you have to borrow, the less you pay in interest. It is the interest part of any repayment mortgage that is the largest, especially at the start of your mortgage.
How you go about applying for a mortgage will be as individual as you. Putting down a huge deposit to lessen how much you need to borrow may sound like the best option, as it reduces the amount of interest that you have to pay. However, this may not be the best approach. You may need to keep some money back for emergencies in the form of savings or cash reserve.
If you have existing debt already, you may not want to pour all of your money into a mortgage. Mortgage interest rates tend to be a lot lower than other typical loan arrangements. So, if you do have existing debt, it may be wise to clear this first.
Mortgage rates also move up and down. If you are applying for a mortgage whilst interest rates are low, you should include an uplift in interest rates into your calculations. You do not want to find yourself in a position, several years later, where you can no longer afford the monthly mortgage payment because interest rates have increased.
Paying for your children’s education is something that most parents do. However, how this education is paid for varies dependent on how cash rich the parents are. It makes more sense to take out additional loans to pay for this college education rather than dip into any retirement fund.
Any borrowing that is used to pay for college, and other associated fees, are normally provided at a much reduced rate for students. They often use these low interest finance options to try and fill student places.
College debt is quite a good debt to have. The lower interest rates, and the more flexible repayment terms, means that this debt should be cleared and repaid in a good time.
Buying a Car on Finance
The current finance deals on offer, when it comes to buying a new car, can be quite incredible. However, you will need to take a smart approach when it comes to deciding whether you require finance or not. The secret is to ask yourself how long you plan to keep your car.
A car will lose a lot of its value as soon as it is driven off the forecourt. The depreciation on some makes and models can be quite absurd. Therefore, you need to think carefully about the type of car you want. You may need to do some research on depreciation values of the makes and models before you make a decision on whether to take finance out or not.
Like a mortgage, if you can afford to put down a larger deposit on your new car before you buy it, do so. This will help lower the interest that you pay on your financial arrangement. It is recommended that you put at least 10 percent down as a deposit on any new vehicle.
If financing a new car in this way does not appeal to you, you may want to consider a lease arrangement. This is where you pay a monthly fee to use the car over a period of years. Once this period has elapsed, you get the choice of keeping it, swapping it or giving back to the car dealer. Again, having a financial arrangement for a new car is seen as a good debt.