Types of debt

I thought all debt was basically the same. It’s not. Some of it costs a little. Some of it can wreck your life.

The common types

Credit cards let you borrow up to a limit and pay it back over time. If you clear the full balance every month, you usually pay no interest. If you don’t, the interest rate is often high.

Personal loans give you a fixed amount, paid back in fixed monthly payments over a set term. Usually cheaper than a credit card, and easier to plan for.

Overdrafts let you spend more than you have in your current account. Handy in a pinch, but often expensive if you stay in them.

Buy now, pay later (BNPL) splits a purchase into a few payments. It feels like it’s free, which is the risk: it makes overspending easy, and missed payments can bring fees and hurt your credit.

Student loans pay for education. How they work depends a lot on where you live (see below).

Mortgages are loans to buy a home, secured against the property. Usually the largest, longest and cheapest debt people have.

Car finance spreads the cost of a car. Remember that cars lose value fast, so you can end up owing more than the car is worth.

The ones to be most careful with

Payday loans and short-term loans are small, fast loans meant to be repaid quickly. They often have very high interest rates and can trap you in a cycle of borrowing again to repay the last one.

Loan apps offer instant cash on your phone. Some are legitimate and regulated. Others charge huge fees and use aggressive or abusive tactics to collect.

Borrowing from friends and family has no interest, but it can cost relationships. If you do it, agree the amount and the repayment dates clearly, and stick to them.

Before borrowing anything now, I ask: what’s the APR, what’s the total I’ll pay back, and who’s regulating this lender? If I can’t answer all three, I walk away.