Situations where Debt is helpful

There are so many articles advising us how to get out of debt, that we may automatically assume debt is a bad thing. However, there are many occasions when debt can actually be a good thing.

These are the situations in which debt can be helpful.

1. Mortgage debt

There are few people who could buy a house without borrowing from the bank. Many people who criticise debt, forget that they have debts of up to £150,000 secured against the value of your home. A mortgage is a big debt, but it is a better financial proposition than renting. Getting a mortgage is like having an investment for the future. It offers the prospective of living debt free in 25-30 years. Furthermore, because it is secured against the value of your house, the interest rate is likely to be relatively low and not much higher.

2. Going to College.

It is unfortunate that, in recent times, debt is almost an essential aspect of going to University / college. However, again the cost of going to University is a good long term investment. A good degree creates the potential for higher earning power. This extra income is greater than the debt incurred. The only thing I would caution is don’t go to university just for the sake of it. If you spend 3 years accumulating debt, but don’t value the degree you are doing, you have to ask yourself whether it really is an investment.

3. Student Loans.

In the UK, student loans are set according to the inflation rate. This means you can borrow the full amount and invest in a higher interest paying account. Even if you don’t need to spend the student loan you can make a return on this debt. Furthermore, repayment on this loan / debt is dependent on income and you will not pay it back until you earnings are sufficiently high.

4. Life Cycle Hypothesis

The life cycle hyposthesis states that we should smooth consumption over the course of our life. There is no point in living in poverty for the first 30 years of our life, and then having loads of money to spend when we are old and unable to enjoy it. Most people find that there income increases over the course of their life and that their expenses fall. Therefore, there is good sense in borrowing during our early working years. If we feel the necessity of having no debts in our 20s, we will either spend all our time working, or we will have nothing to spend. Don’t just think about the future, consider the present as well.

Debt is good so long as we are using it for a specific purpose. If we are investing in our education or purchasing a house, we should not feel guilty and strive at all costs to avoid paying off the debt. What we should be careful of is creating unnecessary debt and holding debt in a form which attracts a high interest rate.