For almost all Australian adults, debt is a part of our day-to-day lives. Regardless of whether you intend to advance your skills by earning a degree, buy a house for your family, or purchase a vehicle so your family has transport, taking out a loan is very common simply because we don’t have enough money to pay for these expenditures upfront. It seems that most people gets a loan at one point or another, so what’s the problem?
The issue is that lots of folks don’t have knowledge of the difference between good debt and bad debt, and as a result, they take on too much bad debt which can bring about considerable financial problems down the road. Not all loans are created equal, and commonly you’ll discover a vast difference between your credit card interest rates and your home loan interest rates. As time go on, your credit report will have a vital impact on your borrowing capacity, so paying your bills on time and not defaulting on any loans is very important, as well as keeping a healthy balance between good debt and bad debt.
Each time you apply for credit, your lending institution will inspect your credit report to determine your financial history and then make a decision whether they’ll authorise your loan. Too much bad debt on your credit report will be viewed detrimentally by lending institutions, as it exhibits poor financial decisions and behaviours. To ensure that you maintain healthy financial habits, it’s critical that you understand 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 frequently an investment that will increase in value with time and will help you in developing wealth or providing long-term income. However, bad debt typically decreases in value quickly and does not add any value to your wealth or generate a long-term return. To give you some knowledge, the following provides some examples of each of these types of debts.
The price of property has traditionally increased with time, so securing a mortgage is considered a good debt because the value of your land will increase in time. At the same time, mortgages typically have low interest rates and a long term, normally 20 to 30 years, which shows that the value of your land can double or triple during the life of your loan.
Getting a loan to invest in the stock market is also deemed to be good debt since the returns on the stock exchange are traditionally favourable. Loan providers usually view stock exchange loans as good debt because you are trying to increase your wealth with time through a stable investment. Be careful though, it’s not wise to invest in the stock market unless you have an acceptable amount of knowledge.
Another type of good debt is investing in your education, whether it be university or a trade, given that it enhances your skills and your ability 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 attractive option.
Credit cards are primarily the worst type of debt a person can have. Credit card debts reveals to creditors that you have poor financial habits because the interest rates are exceptionally high and you have nothing in value to show for your investment. Folks with credit card debts usually have issues in receiving future credit from loan providers.
Vehicles and consumer goods
Another kind of bad debt is loans for vehicles and other consumer goods. When you get a loan to purchase a car, it instantly decreases in value when you drive it out of the dealership. The same applies to consumer goods such as flat screen TVs, because you are essentially paying interest for something that depreciates in value very fast.
Borrowing to repay debt
If you find yourself in a position where you need to take out a loan to repay existing debt, it’s best to seek financial assistance as quickly as possible. This kind of borrowing will only trigger further money problems, and the sooner you act, the more alternatives will be available to you to resolve the issue. If you end up facing a mountain of debt, talk to the professionals at Bankruptcy Advice on 1300 879 867, or alternatively visit our website for further information: www.bankruptcy-advice.com.au/