Foundation 4 of 8

Understand debt

Not all borrowing is the same — the rate and what it bought both matter.

1. Good debt, bad debt, and the bit in between

   Cheap, long-term debt used to fund something that holds or grows in value — a mortgage, sometimes a student loan — behaves very differently from expensive, short-term debt used to fund things already spent or consumed, like a credit card balance carried month to month or buy-now-pay-later.

   Two things determine how serious a debt is: the interest rate, and what the money actually bought. High-rate debt for something already gone is the combination worth tackling first.

2. How to pay off expensive debt

   Two structured approaches work well. Pay off the highest interest rate first (sometimes called the "avalanche" method) — this saves the most money mathematically. Or pay off the smallest balance first (the "snowball" method) for quicker wins that build momentum to keep going.

   Either beats no plan at all. The maths slightly favours avalanche; the psychology sometimes favours snowball. Pick the one you'll actually stick with.

   Worth knowing: making only the minimum payment on high-interest debt can mean paying back several times what was originally borrowed, because so much of each payment goes to interest rather than the balance.

3. Mortgages, explained simply

   A mortgage is a loan secured against the property — meaning it can be repossessed if payments stop. Fixed-rate deals lock your payment for a set period (certainty, but you won't automatically benefit if rates fall); variable or tracker rates move with the market (potential upside, but real risk if rates rise).

   Repayment mortgages reduce the actual amount you owe with every payment. Interest-only mortgages don't — you're only paying the cost of borrowing, and need a separate plan to repay the capital itself. The size of your deposit relative to the property value (loan-to-value) is usually the biggest single factor in what rate you're offered.

4. Student loans: how they really work

   UK student loans behave more like a graduate tax than a conventional loan. Repayments are a percentage of income above a threshold, not a fixed monthly bill, and any remaining balance is written off after a set number of years regardless of how much is left.

   This changes the maths on overpaying. With a credit card, clearing the balance faster almost always makes sense. With a student loan, many borrowers won't repay the full amount before it's written off anyway — so extra payments can effectively be money that would never have been owed. Worth understanding which repayment plan applies to you, since the terms differ by when you started studying.