When is debt a bad idea? And does it matter anyway?

I hate being in debt. If I don’t have money, I just tighten my belt. ~Rula Lenska

Do you carry a debt burden? Almost certainly, we all do. Debt is just part of life, surely? Debt cannot be avoided, can it? Yes, that’s true, at least to some extent. However there’s good debt and then there’s bad debt. The obvious question is when is debt a bad idea?

All personal debt is a burden to some degree. It may be a burden you cannot avoid but it is no less a burden for that. However consider the good versus the bad.

Buying a house for instance requires that you take out a mortgage, which is a debt of course. As long as you don’t overstretch yourself, mortgage debt usually is manageable. With a mortgage the debt is secured against your property, so the risk for the lender is small. If you fail to pay, the lender simply repossesses the property and sells it to recover their money.

So because the associated risk to the lender is low, interest rates on secured debt are low. Coupled with repayment periods typically around 25 years, the monthly repayments are usually not significantly different to what you might pay if you rent a property. However a mortgage means that eventually you will own the property. So from your standpoint that is good surely? What you might call good debt.

You need a roof over your head, so buying with a mortgage makes good financial sense because at least you will own the property in the future. And you should enjoy some capital appreciation over time on the value of the property too. That’s not guaranteed of course but historically that has been the experience so far, certainly in Britain.

So when is debt a bad idea? When it is unsecured debt. And what is unsecured debt? It is debt against which nothing valuable has been put up as security. If you fail to pay then the lender has nothing it can sell on to recover the balance outstanding.

And because unsecured debt has no form of security then lenders charge high interest rates to compensate. They recognise that a proportion of their clients will fail to repay loans, so those that do repay essentially pay extra to protect the lender from any losses due to non-payment.

Occasionally even unsecured debt cannot be avoided. For instance young people just starting out might need some basic items of furniture for their homes, like bed, tables and chairs. These often come with hire purchase arrangements.

So when is debt a bad idea really? Well its debt incurred through the reckless use of credit cards, store cards or a payday loan. This debt is not secured against anything but it comes with very high interest rates.

Credit card or store card debt can have an interest rate up to around 30%. In the UK, payday lenders can often charge interest rates equivalent to 3000%, 4000% or even 5000%. It’s amazing that people fall for them but I guess if your desperate sometimes it’s a case of ‘needs must’.

The compounding effect of high rates of interest will quickly turn small sums borrowed into enormous sums owed. And that’s when people really do become enslaved by their debts. And that’s when it matters.

It seems to me that far too many people borrow money in the form of unsecured debt to purchase discretionary items. That is items they could live without, if push comes to shove. Now borrowing money is this way is a really bad move. Not just bad it’s plain stupid.

I recommend that you follow this simple rule: If you can live without it, don’t use debt to buy it.

Yes of course it’s nice to have the latest smartphone or the latest television or whatever but is it really worth the pressure of unnecessary debt? When high interest rates start pushing up the sum outstanding significantly, will the burden of this unnecessary debt still seem worth it? Probably not.

Wouldn’t it be better to wait until you’ve got the money instead? Wouldn’t it be better and cheaper in the long term to save up and buy the product with cash? You’ll appreciate the item so much more too.

Being indebted is just a form of slavery. It’s as simple as that really. And, once again, that’s why it matters.

For as long as you owe money you can never be truly free.

If you’re debt free then you’re stress free too. Wouldn’t you prefer to be debt free and stress free?

Good debt will help you but bad debt will make your life a misery.


When is debt a bad idea? When it’s unsecured debt at high interest rates used to buy stuff you could live without. And does it matter? Yes, it does, because debt enslaves you. If you only take one message away from this article then that is it.

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