Debt and loans, if used well, can help you live a better life and achieve your goals.
But they can also cause problems that last a lifetime - so it’s important to understand them so you can make the best decisions for you.
Here’s a quick breakdown of what debt is, different types of debt, problems that come with debt and tips for dealing with it.
What is debt?
What are the main types of debt?
Some of the most common types of debt are:
- Personal loans
- Credit cards
- Overdrafts
- Buy Now Pay Later
- Payday loans
- Mortgages
- Car loans
Student loans in the UK
Student loans are one of the biggest debts you might take on in your life.
But if you’re from the UK and are studying in the UK, your student loan is different to the forms of debt mentioned above.
Why? Because in the UK, student loans work more like a tax than a loan.
Most loans must be paid back on a set schedule. But you’ll only start paying back UK student loans once you start earning a certain amount of money, known as the repayment threshold.
Even then, you’ll only pay back a percentage of everything you earn above that threshold - and if your income drops below the threshold, you’ll stop making repayments until you reach that earning threshold again.
So while a big student loan number can seem scary - there’s not as much to worry about as there might initially seem.
Learn more about student loans in our ultimate guide to student funding.
‘Good debt’ - what’s that?
While debt has a negative reputation, some people refer to certain debt as ‘good debt’.
This might be money you borrow to:
- Help you progress in life
- Improve your life prospects and outcomes
- Take advantage of opportunities you wouldn’t otherwise be able to
By taking out a student loan, you hope to get a good degree that will help you get a better job vs. not going to university, so you’ll earn more money, be more comfortable in life, be more fulfilled, etc.
A business might borrow money and use it to achieve more success (and more quickly) than they might be able to without the loan.
A mortgage could also be seen as ‘good debt’: without one, it’s unlikely you’ll be able to buy a house, so if this is a goal for you, a mortgage could fall into this category.
There’s never a guarantee that ‘good debt’ will pay off, of course - your degree might not get you a well-paying job, the business might fail or you might regret buying a house.
What is bad debt?
‘Bad debt’, on the other hand, is money you borrow that doesn’t help you achieve your goals or have more fulfilment in life.
This might be:
- Debt to impress other people - the things you buy might make you feel good at first, but probably won’t lead to a sustained positive feeling
- Buying things you know are out of your budget - this’ll cause you financial difficulties in the future
- Mortgage - this could also fall into the ‘bad debt’ category if it leads you to money problems, especially if you get a mortgage just because you think you should buy a house, not because you actually want one
Interest on debt
Some debt is interest-free: you’ll only pay back the same amount you borrowed, nothing extra. If your mum lends you £10, she’ll probably only expect £10 back.
But for most debt, you’ll be charged interest.
Maybe you’ve got a savage grandad who lends you £100 but expects £150 back for his trouble. 🤝
Or if you get a mortgage, you’ll end up paying the lender more than you initially borrow.
The higher the interest rate on a loan, the more you’ll end up paying back.
Learn more about this in our Debt pathway.
Paying back debt
At some point, you’ll have to pay back any money you borrow.
You’ll often do this in monthly repayments. Sometimes you’ll pay a set amount each month. Other times you’ll be able to choose how much you pay, as long as you pay at least the minimum required payment.
But only paying the minimum usually isn’t a good idea - just paying the minimum can harm your financial wellbeing.
How debt can spiral out of control
Debt can become a bigger and bigger problem because of compounding.
Imagine you borrow £100 from a bank and you’re charged 10% interest each month.
After one month, if you make no repayments:
- You’ll owe: £100 + [10% of £100] = £100 + £10 = £110
- You’ve been charged £10 in interest
After month two, you’ll be charged another 10% interest, so if you still don’t make any repayments:
- You’ll owe: £110 + [10% of £110] = £110 + £11 = £121
- You’ve been charged another £11 in interest
- In total, you’ve been charged £21 in interest
By not paying off the debt, you’re charged more interest each month - meaning it grows more and more quickly. This can spiral out of control and leave you in financial trouble, wreaking havoc on your finances and financial future.
Even if you do make repayments but don’t repay at least the amount of interest you’re charged each month, your total debt will continue growing. For example, if in the above example you made a repayment of £5 each month:
- After month one, you’d owe £105
- After month two, you’d owe £110.50
To reduce your debt, you need to pay off more than you’re being charged in interest each month.
Earning interest on savings
On the other hand, by earning interest on savings, you can see your savings grow exponentially.
Learn how compound interest can work to your benefit.
Debt and credit scores
Your credit score will go down if you don’t keep up with regular debt repayments. This’ll make it harder and more expensive to borrow money in the future, limiting your possibilities: it could end up being harder to buy a house or get a business loan, for example.
Luckily, student loans are again different from other debts - they don’t feature on your credit report so won’t affect your credit score! 🙌
Get tips on improving your credit score.
How debt can impact your wellbeing
Stress and worry over debt can also have a huge negative impact on your physical and mental wellbeing. Especially if you’re dealing with money problems while trying to get through your degree, something that can already cause stress. This can include:
- Struggles sleeping
- Loss of appetite
- Loneliness
- Digestive issues
- Anxiety
- Depression
- Weight loss
These are just some potential knock-on effects of the stress debt can cause. Worries about debt will impact all areas of your life, including your relationships, which is why it’s so important to be careful with debt.
Tips for dealing with debt
Only take on debt as a last resort
Debt shouldn’t be taken on lightly. Even if it’s interest-free, such as a student overdraft, you’re still using other people’s money - so it’ll have to be paid back eventually.
Explore all other options before taking on debt. We’ve got some examples below.
Use technology to help manage your money
Debt problems are often caused by struggles managing money and losing track of finances. Luckily, nowadays many apps can help with this.
The Blackbullion app lets you track your spending automatically and see all your accounts in one place, making it easier to stay on top of your money.
Explore all forms of funding
Get the maximum student maintenance loan you’re eligible for before taking on other forms of debt. This is a much less dangerous form of debt than other loans.
But also make the most of all additional funding, such as scholarships, bursaries and grants. There are millions of pounds available in the UK, so have a look to see what you might get.
You could end up with thousands of pounds of extra money to help with your costs while at uni and help you stay out of additional debt. Our Funding Hub includes lots of funding opportunities you might be interested in, from your university, charities and other organisations.
The importance of budgeting
Budgeting will allow you to understand your finances, helping you not get into debt in the first place.
If you are in debt, it’ll help you manage the debt and work towards getting out of it.
Check out our Budgeting 101 pathway to master the basics.
Find ways to make money
There’ll always be a limit to how much you can cut costs. But there’s no limit to how much you can earn.
Try to find ways to make money alongside your studies. This might be:
- Jobs on campus - such as a student ambassador or working in the library
- Online jobs - this could be tutoring or freelance work
- Gig economy jobs - a Deliveroo driver or Task Rabbit
Here are some other ways to make money as a student.
Get help if you’re struggling
The worst thing to do if you’re struggling under insurmountable debt is to struggle in silence.
Seek help as soon as possible - it might feel uncomfortable but it’s an important step on the road to getting out of debt.
We've got a list of places to find help if you're struggling financially.
We’ve covered the basics of debt and loans, but if you’d like to expand your knowledge, you can go through our Debt pathway.
