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Good debt, bad debt

There is good debt and bad debt. Good debt will brighten your financial future, or create long-term income - like a Student Loan. Bad debt is spending money on things that will lose their value and won't create future income. One example of bad debt is a phone that will quickly become outdated or damaged.

Student Loans

A Student Loan is usually considered a good debt as it should enable you to earn more money in the future. Student Loans in Aotearoa New Zealand make study after secondary school possible. They are a powerful tool enabling you to upskill, further your education and enter the workforce in a higher pay bracket than you would otherwise be able to.

But Student Loans can be made up of some bad debt too. Your Student Loan balance will impact your future more than you might imagine now (it may be with you for quite a while), which makes it crucial to make smart choices about what you use your student loan for. For example, a $30,000 Student Loan is significantly easier to pay off than a $40,000 Student Loan.

It also matters how you pay a Student Loan back. For example, Student Loans taken out in Aotearoa New Zealand are interest free, but only if you stay and live in Aotearoa New Zealand. If you transfer overseas after taking out a Student Loan, you will have interest added to your loan payments. This interest can be hefty, so think about how it may affect your payments before moving overseas.

If you are considering a Student Loan we have more information and links to help you understand what Student Loans can be used for in our article linked below.

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Credit from a bank

Credit is a loan that lets you borrow from the bank, who then sends you a bill with for the loan amount plus interest. A credit card is one type of credit and an overdraft on your everyday debit card is another.

Almost every bank will offer types of credit in some form or another, and although as a general rule it’s best to avoid these, they can help improve your credit score if you can manage them without losing control.

For a helpful guide to what a credit card is and how to use one, check out the below Sorted link.

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The cost of interest

When taking out any loan, interest rates matter. So do terms and conditions and any fees. Make sure you are aware of any fees that will be charged for starting the loan, or paying it off early.

Sorted has a debt calculator that can give you an idea of what the cost of a loan will be before you apply, but keep in mind that some lenders charge interest in different ways. For example, if you visit a payday lender, you will be hit with much higher interest rates and fees than if you take a personal loan out from your bank. This will escalate the cost of the loan and how much you repay.

Have a play with Sorted’s debt calculator and see what happens when you borrow $1,000 with an interest rate of 25% versus 50%.

Make sure you can fit the loan repayments into your budget before committing to anything. You should only take out a loan if you know you can pay it back.

You might think you are entitled to borrow money, but it doesn’t quite work that way. Everyone who wants a loan must apply, and have the application approved, before getting any money. This application process makes sure borrowers can pay their debts and keeps our economy afloat. If any country’s citizens have too much debt it affects their spending ability, and then the country’s economy.

Making smart choices

There are many ways you can avoid debt. Saving a specific amount or percentage of your income every time you get paid is one way (aim for 20%), and another is to live within your means. This means that you spend less or equal to what you make. This can be hard to do, as there are many temptations to buy and spend more. Many people want more than they have, but being happy with what you have increases life satisfaction and overall wellbeing.

If you find yourself spending more than what you make and still aren't getting your basic needs met, use the following links to find out what financial support you might qualify for from the government.

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Where can I go if I get into financial trouble?

Sometimes debt can get out of hand and repayments difficult to make. If you are finding it hard to manage, talk to your lender, the organisation you've got your loan from, about your options. A conversation can sometimes result in an easier-to-manage repayment schedule.

Otherwise, there are places you can go for budgeting help. Check out the Student Leavers’ Toolkit budgeting page or call MoneyTalks.

MoneyTalks is a free helpline available to provide budgeting advice to individuals, family and whānau. To get free and confidential budgeting advice, reach them on 0800 345 123.

Key websites

  • IR: Inland Revenue collects taxes for the government and its funded programmes. They will be the government agency that you pay your student loans repayments to.
  • Sorted: Sorted is a personal finance site that has the tools and information you need to tackle debt, plan and budget, save and invest, dial up your KiwiSaver, plan for retirement, protect what's important, and take on a mortgage. Sorted lets you fine-tune your finances and get ahead moneywise.