When good debt goes bad

Lesson 9 of 11 in our free Good Debt vs Bad Debt guide: a 5-minute money game with the key points below.

This lesson is in the full version.

Free with a code from your uni, college, council, landlord or employer (worth £600/year). Lesson 1 of Good Debt vs Bad Debt is free for everyone.

Questions you'll answer

Illustration: the £180,000, 25-year mortgage costs about £991 a month at 4.5%. If the rate rose to 6.5%, roughly what would the monthly payment be?

Why can moving a car loan into your mortgage cost more overall, even at a lower rate?

A mortgage that's a third of take-home pay, with savings for rate rises → Still good. Affordable with a cushion.
Adding a new car to the mortgage and paying it off over 25 years → Gone bad. The car will be scrap long before it's paid for, and you pay interest for decades.
A business loan for a shop with no customers yet and no plan B → Gone bad. No income to repay it means the debt lands on you.
A van loan for a courier with steady contracts and a buffer → Still good. Earns its keep, with room for a bad month.
Myth: “A bigger loan is fine as long as the lender approves it.” — Approval isn't the same as comfortable. Check your own budget with room for rate rises.
Fact: “Variable-rate debt can get more expensive while you hold it.” — If rates rise, so do your payments.
Fact: “Secured debt puts the thing it's secured on at risk if you can't pay.” — For a mortgage, that's your home.