Debt can be a useful part of personal finance when it’s approached with care. Whether it’s used to fund your education, buy a home, or deal with unexpected expenses, borrowing money isn’t necessarily a bad thing. But without proper planning, it can easily become a source of long-term financial stress. 

Understanding when it makes sense to borrow, and how to do so responsibly, is key to maintaining financial stability. In this article, we’ll explore how to tell the difference between helpful and harmful debt, how to assess whether a loan fits your financial situation, and how to recognise the early signs of trouble before they escalate.

Understanding Good vs. Bad Debt

Debt isn’t automatically a bad thing. It’s a tool, and when used wisely, it can help you grow your wealth or achieve long-term goals. The key difference between good and bad debt is how you use it and whether you have a plan. 

Good debt isn’t necessarily about borrowing for traditional “good” things like a home or education. It’s about using borrowed money strategically to help reach your long-term financial goals. Good debt is about having a clear plan for how the debt fits into your broader financial strategy. For example, borrowing to take advantage of a business opportunity or using debt strategically to manage cash flow when the timing aligns with your long-term goals can be a wise move. The idea is to use borrowed money to help further your financial situation, not to increase your debt load without purpose.

Bad debt comes from borrowing without a clear, long-term plan. While it’s easy to think of bad debt as spending on unnecessary items or indulgences, it can also happen when you don’t fully understand how the debt fits into your bigger picture. For example, using credit to buy a luxury item without a clear repayment plan can lead to strain. Even if you can afford the item and use credit for perks like cashback or points, it’s still important to make sure it fits comfortably within your budget and overall goals.

The difference is simple. Good debt is about strategy, planning, and alignment with your financial goals. It’s borrowing with a clear understanding of how it fits into your cash flow and future plans. Bad debt comes from borrowing without a clear purpose or failing to plan how you will repay it effectively.

Assessing Loan Affordability: What To Consider

Once you’ve decided that borrowing may be necessary, the next step is to figure out whether it’s affordable. A simple way to assess this is by calculating your Debt-to-Income (DTI) ratio. This compares your total monthly debt repayments to your gross monthly income.

| DTI = (Total monthly debt payments ÷ Gross monthly income) x 100 |

If your DTI is under 35 percent, your debt is generally considered manageable. A higher number might be a sign to slow down and reassess. 

Affordability is not only about ratios. It is important to see how new repayments fit within your overall budget. Many people follow the 50/30/20 guideline, where 50 percent of income goes to essentials such as housing and food, 30 percent to personal or lifestyle expenses, and 20 percent to savings and debt repayments. If a loan pushes you outside this balance, you may need to think carefully about whether it is the right decision. 

Other factors also affect how comfortably you can repay a loan. Job stability is one of the most important. If your income is variable or comes from contract work, even small repayments may be difficult during months when income dips. The loan’s interest rate and repayment term also matter. Longer terms may lower monthly payments but increase the total interest paid over time. Even small differences in interest rates can significantly affect the overall cost. Additionally, if you already have existing financial commitments, adding another loan could stretch your budget too thin. 

Lastly, consider your emergency fund. Having savings set aside for unexpected expenses can prevent the need for additional borrowing. If you do not have an emergency fund, prioritising building one may be a better step before taking on new debt. For practical advice on how to get started, see our article on Building an Emergency Fund.

Early Signs Of Debt Stress

Sometimes financial difficulties develop quietly and gradually. Being aware of early warning signs can help you address problems before they become serious. These signs may include only making minimum payments on loans or credit cards, relying on one form of credit to pay off another, or feeling anxious and overwhelmed about your finances. 

If you notice these symptoms, it could be time to review your spending, adjust your budget, or seek advice. Taking early action can prevent deeper financial challenges. 

To assist with self-reflection, you may find it helpful to complete a Debt Awareness and Affordability Quiz.

Create your own user feedback survey

This tool encourages you to evaluate whether your borrowing aligns with clear financial goals, if your repayments fit within your budget, and how confident you feel about managing debt now and in the future. It is not a test, but a useful way to understand if your borrowing habits support your long-term financial health.

When Borrowing Can Help 

If you have carefully assessed your situation and find that you need short-term financial support, there are responsible options available. For example, GXBank’s FlexiCredit offers a flexible credit line designed to assist with genuine needs. It is not intended to replace emergency savings or budgeting efforts but can provide additional support when you have already taken steps to understand and manage your affordability. 

FlexiCredit offers flexible repayment terms and a straightforward application process, aiming to adjust to your financial circumstances and help you manage your money with greater ease.

• TAGS:
• FlexiCredit
• GXBank