What debt is and why it matters
It’s the offer dreams are made of: $1,000 instant cash, sign up here! But take a closer look at the T&Cs and you’ll see those dreaded words: “1300% APR”. You never get money for nothing, sadly: there’s no such thing as a free lunch, and the cash will cost you by way of debt. Debt can be useful, although it’s also one of the easiest ways to fall into financial trouble. But fear not – in this Pack, we’ll teach you how to conquer any debt mountain.
What is debt?Debt is simply when you owe money. If you borrowed $10 from your friend last night for McDonald’s, you’re technically in debt to them. But in this Pack, we’ll be mostly talking about money owed to institutions. That could be an overdraft at the bank (when you go into a negative account balance), an unpaid credit card bill, or a mortgage on your home.
A mortgage is an example of where debt’s not just useful, but essential – most people would never be able to afford a house without a loan. And professional investors love debt: it lets them buy more things with less money up front, so they can rack up a bigger portfolio and (hopefully) bigger gains. But if used irresponsibly, debt can be devastating 😳
How? When you take out a loan, you have to pay interest for the privilege. That interest is a percentage of the loan, and is normally quoted annually. A 1300% APR (annual percentage rate) on a $1,000 loan means that you’ll have to pay a whopping $13,000 in interest each year – as well as eventually paying back the original $1,000 you borrowed. If you let your debts accumulate, it’s easy for payments to quickly become overwhelming.
Why does debt matter? Banks aren’t charities, and they won’t be happy if you don’t repay your debts. The consequences of missing payments can be very severe. If you don’t pay your mortgage, your home could be forcibly repossessed by the lender – leaving you out on the street. And even “unsecured” debt like credit card bills or overdrafts could land you in a courtroom, with bailiffs seizing your stuff to pay off the loan. Say bye-bye to your iPhone… ☹️
There are long-term consequences too. Big debts can hurt your credit score, making it harder for you to get credit again – including taking out a mortgage or getting approved to rent an apartment. And if things get really bad and you have to declare bankruptcy, that can prevent you from getting certain jobs.
But keep calm and don’t panic. In this Pack, we’ll show you how to avoid getting into a debt dilemma – and if you’re already in one, we’ll show you how to tackle it. You’ve taken the most important step by looking for help and information – knowledge is the ultimate debt-busting power 🧠
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