Skip to 0 minutes and 0 secondsSPEAKER: And we're going to play the Good Debt, Bad Debt game. OK? You are going to have to engage and join with me, and it'll give me a break from [INAUDIBLE]. So it's very simple. If you think it's good debt, you say "good debt." So, if you think it's good debt, you say--
Skip to 0 minutes and 12 secondsAUDIENCE: (DULLY) Good debt.
Skip to 0 minutes and 13 secondsSPEAKER: Now come on, room, you're all in suits, but we're going to do it properly. This was designed for 15-year-olds. You can cope. If it's good debt, you say--
Skip to 0 minutes and 19 secondsAUDIENCE: Good debt.
Skip to 0 minutes and 19 secondsSPEAKER: If it's bad debt, you say--
Skip to 0 minutes and 21 secondsAUDIENCE: Bad debt.
Skip to 0 minutes and 21 secondsSPEAKER: Now we're warmed up. And so let's get going. Right. It's very easy. Question number 1. Designed for 15-year-olds, but there's an important message that goes there, and I'm always fascinated to hear the response of the room. Question number 1. I've been saving up to get a mortgage-- a place for me and my family to live. We've managed to get a big-enough deposit. It's over 10%. We're looking for someone for the long term, not an investment. We're getting a fixed-rate mortgage for five years. It's affordable, and it's actually cheaper than our current rent. Good debt, bad debt?
Skip to 0 minutes and 54 secondsAUDIENCE: Good debt.
Skip to 0 minutes and 54 secondsSPEAKER: Good debt. Of course it's good debt. But oh-- lo and behold, look what we've just done, room! We have said debt is good! What happened to our grandparental "Neither a borrower nor a lender be, young Johnny"? Well, it's gone out the window. Because if you want to buy a house in our modern world, you're going to have to borrow. If you want to go to university, you're going to have to get what we call "debt"-- I would argue it isn't-- but it's what we call a "student loan." So what we have to do, now, within financial education, is embrace the complexities of our modern world. We have to teach, debt isn't bad, bad debt is bad.
Skip to 1 minute and 24 secondsHow do we give you the tools to make these decisions? Question number 2. [LAUGH] I've just seen a holiday to Jamaica. It costs 19,000 pounds. I earn 5,000 pounds a year. But the Payday Loan Company says they'll lend me the money at only 10% interest-- an hour. Good debt, bad debt?
Skip to 1 minute and 49 secondsAUDIENCE: Bad debt.
Skip to 1 minute and 50 secondsSPEAKER: Bad debt, of course! I'm not saying all debt is good! Of course we need to say, when is it right? When is this an investment base? Have you planned for it-- budgeted? Can you afford it? What are you going to get back? How is it going to enjoy the functionality of your life? Question number 3. I used to work in a big urban centre-- a city, if you like. I lost my job six months ago, and it's been a real struggle to find a new one. This week, I've just been offered a new job. It's in the countryside. Going to have to move myself and my family, but we found a house we can afford to live in.
Skip to 2 minutes and 23 secondsProblem is, we always went by public transport in the past. And where we're going to be living now, my kids' school is seven miles in that direction, and my work is eight miles in that direction. Before you get clever, one of my children is disabled and has a bad leg, so there's no cycle.
Skip to 2 minutes and 41 secondsThis is the problem. I've got a very bad credit score, because I've been unemployed. So it's going to cost me 20% APR to get the loan. And that-- the repayments, over five years, are going to put me at the brink of affordability. I can just do it, just manage it, on the first income. But I've got a three-month probation period. I've got the job. If I don't get the car, I can't get the job. If I get the car and get the job, but my three-months probation goes, I'm totally gone, because there's no way I can afford to pay this and frankly push me over the edge, I'll go bankrupt. Good debt, bad debt?
Skip to 3 minutes and 17 secondsAUDIENCE: Is there a credit union? [LAUGHTER]
Skip to 3 minutes and 20 secondsSPEAKER: 20% APR wouldn't be that bad at a credit union either, I'm afraid.
Skip to 3 minutes and 24 secondsAUDIENCE: [INAUDIBLE]
Skip to 3 minutes and 25 secondsSPEAKER: Smart-arse. [LAUGHTER] Good debt, bad debt? Good debt, bad debt? OK, see, it wasn't quite as easy as you all thought it was going to be in the start. I'm going to give you a second, to mull. I know we have very eminent people in this room. I'm going to ask for a hands-up. Hands up, good-- and anybody in here-- and I'm watching, and I'm vicious. I always need a butt of my jokes when I do a talk. If your hand doesn't go up in one of these options, that's you. OK? So I want good debt or bad debt.
Skip to 3 minutes and 56 secondsI don't care which one you choose to vote for, but as long as your hand goes up at some point-- cameraman, you're allowed off.
Skip to 4 minutes and 1 secondCAMERAMAN: Thank you.
Skip to 4 minutes and 1 secondSPEAKER: Right. You're not. Good debt?
Skip to 4 minutes and 7 secondsBad debt. Interesting. So let me tell you the official money saving expert answer. It's great debt. It's somewhere between good and bad. No, I set the questions, I can give the answer. But the really important point, here-- What's fascinating, by the way, is when you do this to 15-year-olds, they are vastly, predominantly bad debt. When you do this to a normal group of adults, it's 50-50. When you do this to an educated room of financial people, it tends to be 75%-plus good debt. Really interesting. Because I think the risk-averse nature of kids-- they're very black-and-white. It's all black-and-white. No, borrowing is bad. I've been told borrowing's bad. I'm not going to get the debt.
Skip to 4 minutes and 45 secondsWhat adults tend to do-- I mean, in fact, if you said "good debt" because what you thought is six months unemployed is too long, this is an opportunity, I've got to take it, I've got trust in-- faith in myself that I'm going to get this job. I'm going to work hard to make sure it doesn't go wrong. So I'm going to make the best of my opportunity, because the downside, frankly, isn't that much worse than I've got right now. OK, I'll be bankrupt, but I've got nothing. I've got no job. But the upside is an ability to feed my children and have a house and a better life. Then, correct, good debt was right for you.
Skip to 5 minutes and 14 secondsTo those who said "bad debt" and thought, you know what? I don't really like bad debt. I believe in myself. I think I might get another job somewhere else more quickly, and I'm willing to hold out a little bit longer to wait until it's a sensible time and get something somewhere else. And I prefer to be debt-averse. Congratulations. You got the right answer for you. To those who just stuck your hand in the air because I forced you to, you've got a problem. Right.
Skip to 5 minutes and 37 secondsAnd what we have to do, when we educate about debt, and the most important thing that this teaches us in life, and one of the most difficult things to educate children and adults, and I struggle with it personally, is uncertainty. You know, as an expert, people ask me all the time, what's going to happen to interest rates? What's going to happen to house prices? Should I buy a new house? I don't know. The only way I could know is with a crystal ball. They don't exist. And we're very bad, even-- should I marry this woman? Am I going to be in love with her for the rest of my life? Is that going to work?
Skip to 6 minutes and 3 secondsYou know, should I take the job I've been offered? I'm in a good job right now. This sounds better, but will I enjoy it? That is dealing with uncertainty. And what we have to do is plan for the worst, hope for the best, look at the upsides and downsides, take a risk, and not beat ourselves up if it goes wrong. All of those of who said "good debt," if you hadn't got the probation period, didn't mean you made the wrong decision. Because you didn't have those facts, and it is impossible for you to know those facts at the time.
Skip to 6 minutes and 28 secondsAnd yet in life we-- as adults and children, we are given this idea that there's some sort of universality of right and wrong. And perhaps each of those three questions, while they sound quite trivial, the first one is designed to teach that debt can be good-- or at least necessary. The second one is designed to say, let's not be stupid when you borrow. And the third one's designed to say, sometimes there isn't a right answer. And actually those lessons are very important for that sense.
In the video, Martin Lewis – money saving expert and media adviser on financial management – engages in a discussion with an audience about good and bad debt.
Debt is a topical issue, and for many households a sensitive and problematic one. But it’s necessary to take a measured approach and recognise, as Martin Lewis demonstrates, that all debts are not bad debts.
Debt arises when we borrow money, and there are many forms of borrowing – from credit card debt to bank overdrafts, bank loans, student loans (to finance higher education) and mortgages (to finance the purchase of property or land). Debt can be used to provide finance for everything from day-to-day spending (you’ll be aware of the growth in recent years of ‘payday’ loans) to holidays and to items we use over a number of years, such as furniture, cars and our homes.
Since 1993 the aggregate (total) value of personal debt has risen 3.5 times to a total of £1.51 trillion. The vast majority – circa 88% – of this is ‘secured debt’, money lent against the security of property or other assets that the lenders can take possession of if the borrower fails to repay the money that has been lent to them. The rest is unsecured debt, which, since the late 2000s, has actually fallen slightly in aggregate value.
The UK has seen some dramatic swings in interest rates in recent decades – from the highs of the early 1980s to the historic lows we’re currently witnessing. So getting to grips with the factors that determine how much we have to pay on our debts is an essential aspect of financial planning.
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