The Difference Between Good Debt and Bad Debt – What You Need To Understand

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For almost all Australian adults, debt is a part of our day-to-day lives. Whether you would like to further your skills by obtaining a degree, purchase a property for your family, or buy a vehicle so your family has transport, taking out a loan is very common simply because we don’t have sufficient money to pay for these costs upfront. It seems that most people secures a loan at one point or another, so what’s the issue?

The problem is that a lot of folks don’t understand the difference between good debt and bad debt, and as a result, they take on too much bad debt which can bring about significant financial problems in the coming years. Not all loans are created equal, and normally you’ll discover a vast difference between your credit card interest rates and your home loan interest rates. With time, your credit report will have a great impact on your borrowing abilities, so paying your bills on time and not defaulting on any loans is crucial, coupled with keeping a healthy balance between good debt and bad debt.

Each time you apply for credit, your lender will check your credit report to evaluate your financial history and then figure out whether they’ll endorse your loan. Too much bad debt on your credit report will be viewed adversely by financial institutions, as it displays poor financial decisions and behaviours. To make certain that you maintain healthy financial practices, it’s vital that you grasp the difference between good debt and bad debt.

What’s the difference?

The difference between good debt and bad debt is pretty straightforward. Good debt is typically an investment that will increase in value in time and will support you in developing wealth or providing long-term income. On the contrary, bad debt normally decreases in value rapidly and does not add any value to your wealth or generate a long-term return. To give you some understanding, the following gives some examples of each of these types of debts.

Property

The price of property has traditionally increased in time, so securing a home loan is considered a good debt because the value of your land will increase in time. At the same time, home loans largely have low interest rates and a long term, normally 20 to 30 years, which suggests that the value of your property can double or triple during the life of your loan.

Stock exchange

Obtaining a loan to invest in the stock exchange is also regarded as good debt simply because the returns on the stock market are historically favourable. Loan providers typically view stock market loans as good debt because you are aiming to improve your wealth in time through a sound investment. Be careful though, it’s not wise to invest in the stock exchange unless you have an adequate amount of knowledge.

Education

Another kind of good debt is investing in your education, whether it be university or a trade, since it improves your skills and your capacity to earn a higher income down the road. In Australia, the interest on HECS loans are equal to inflation which clearly makes them a very enticing option.

Credit cards

Credit cards are traditionally the worst type of debt a person can have. Credit card debts shows to creditors that you have poor financial habits because the interest rates are exceedingly high and you have nothing in value to show for your investment. Individuals with credit card debts frequently have challenges in receiving future credit from financial institutions.

Vehicles and consumer goods

Another type of bad debt is loans for vehicles and other consumer goods. When you take out a loan to buy a vehicle, it instantly decreases in value when you drive it out of the dealership. The same applies to consumer goods like flat screen TVs, because you are basically paying interest for something that depreciates in value very fast.

Borrowing to repay debt

If you end up in a situation where you need to take out a loan to repay existing debt, it’s best to seek financial assistance immediately. This kind of borrowing will only create further money problems, and the sooner you act, the more options will be available to you to resolve the issue. If you find yourself dealing with a mountain of debt, get in contact with the professionals at Bankruptcy Advice Adelaide on 1300 879 867, or alternatively visit our website for more information: www.bankruptcy-advice.com.au/Adelaide

 

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