MyBnk youth ambassador Gabriella gives us a glimpse into different forms of debt that young people may come across and how best to navigate them.
Turning 18 is a significant milestone in life for many reasons, but one of the most important is the newfound ability to borrow money. From this point on, personal finance starts to get serious. The days of saving loose change in a piggy bank are over; now, money has real power, which can either help you or lead to financial trouble.
Debt is often compared to fire: a useful tool but one that can hurt you badly, not with flames but with interest and charges that can leave you feeling burned. This isn’t about avoiding borrowing entirely, but understanding the benefits and risks of debt, which is a part of modern life whether you like it or not.
Student Loans: Your First Step into Debt
The first type of ‘debt’ you’re likely to encounter is a student loan. This loan is meant to cover the cost of going to university, and it charges a low rate of interest based on inflation (the rise in prices over time). The good news is that this loan will be canceled after 40 years, and you only have to start paying it back if you earn over £25,000. If you earn less, you don’t have to pay anything.
Banks and University Debt
When you start university, banks will be eager to sign you up for their student accounts. These accounts often come with an interest-free overdraft, which many people mistakenly think is free money. But remember, overdrafts need to be paid back, and once you graduate, you’ll start paying interest on them. Overdrafts now come with interest rates around 40%, making them one of the most expensive types of debt if you don’t manage them well.
Credit Cards
Credit cards are another flexible type of debt. They can be used for spending, paying off other debts, or even transferring money to your bank account. If you pay off your credit card bill in full each month, you avoid interest charges and enjoy benefits like building a good credit score, better protection on purchases, and sometimes even cashback. However, the ease of using credit cards can lead to overspending, and with interest rates often around 30%, this debt can quickly add up. For example, if you borrowed £3,000 on a credit card and made only the minimum payments (normally the greater of 3% of the balance or £5) it could take until you are 50 years old to pay off the debt.
Mortgages: Long-Term Debt for Buying a Home
A mortgage is a long-term loan used to buy a house, usually lasting 25 years with relatively low interest rates (around 5%). While mortgages allow you to purchase property, not keeping up with payments can result in losing your home. Because you are borrowing a large sum of money over a long time, the overall cost of a mortgage is high, so it’s important to budget carefully.
Short-Term Debt: Payday Loans and BNPL Schemes
Payday loans and Buy Now Pay Later (BNPL) schemes are common short-term borrowing options. Payday loans are quick, small loans (up to £2,000) to cover unexpected expenses, but they come with very high interest rates, making them extremely costly. Having a payday loan on your record can make it harder to get other types of credit, like a mortgage.
BNPL schemes allow you to spread the cost of purchases over time without paying interest. They can be useful for managing expenses if used carefully, but they also carry the risk of overspending. Many BNPL providers have been criticised for not checking if borrowers can afford the repayments, so it’s wise to use these options cautiously.
Should You Borrow Money?
In today’s world, borrowing can be necessary for major life steps like going to university or buying a house. However, debt should be approached with caution. It should be affordable, part of a budget, and used for specific purposes. While debt can be helpful, it’s essential to manage it responsibly to avoid financial trouble. Ultimately, you are the best judge of your personal finances and should make borrowing decisions that align with your financial goals and situation.
To access our resources for young people go to https://www.mybnk.org/yp/
