Topic Summary
What Is Debt?
Debt occurs when you borrow money and are obligated to repay the lender. While some debt is considered “good” because it helps you purchase valuable items—such as a home, education, or to start a business—there is also “bad” debt. Bad debt arises when money is borrowed to buy items that depreciate (lose value) or to finance day-to-day expenses like clothing or cars.
Borrowing Options
- Overdraft:
- Occurs when there isn’t enough money in your account to complete a transaction, but the bank allows the transaction to go through.
- Credit Card:
- The credit card company pays the seller, and you repay the borrowed amount each month.
- Friends and Family:
- Borrowing money from people close to you, which may be interest-free but can feel uncomfortable.
- Payday Loans:
- Short-term, high-interest loans for small amounts.
- Personal Bank Loans:
- Fixed amounts borrowed from a bank, repaid in monthly instalments.
- Buy Now, Pay Later:
- Schemes that allow you to purchase items and pay for them at a later date.
Question
Which of the following is an example of 'good' debt?
Discussion
Is all debt ‘bad’?
How it works in real life
Sam has just started a new job. He currently spends two hours commuting by public transport, but driving would cut his commute to less than half the time. Sam is considering buying a car. What borrowing option (if any) should he consider, and why? Are there any other costs Sam needs to consider before purchasing a car?