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 daily lives. Whether or not you wish to advance your skills by obtaining a degree, purchase a home for your family, or buy a car so your family has transport, getting a loan is very common simply because we don’t have enough money to pay for these expenditures upfront. It seems that everyone takes out a loan at one point or another, so what’s the concern?

The concern is that too many people 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 on considerable financial problems down the road. Not all loans are created equal, and commonly you’ll discover an extensive difference between your credit card interest rates and your mortgage interest rates. Gradually, 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 integral, as well as keeping a healthy balance between good debt and bad debt.

Each time you request a line of credit, your loan provider will examine your credit report to analyse your financial history and then figure out whether they’ll authorise your loan. Too much bad debt on your credit report will be viewed negatively by lenders, as it showcases poor financial decisions and behaviours. To make certain that you maintain healthy financial habits, it’s vital that you are aware of the difference between good debt and bad debt.

What’s the difference?

The difference between good debt and bad debt is relatively straightforward. Good debt is commonly an investment that will increase in value in time and will support you in generating wealth or providing long-term income. On the other hand, 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 insight, the following offers some examples of each of these types of debts.

Property

The price of property has traditionally increased over time, so obtaining a mortgage is considered a good debt because the value of your land will increase over time. Furthermore, mortgages normally have low interest rates and a long term, normally 20 to 30 years, which indicates that the value of your property can double or triple during the life of your loan.

Stock Market

Getting a loan to invest in the stock market is also regarded as good debt because the returns on the stock exchange are traditionally favourable. Lending institutions usually view stock exchange loans as good debt because you are attempting to increase your wealth in time through a sound investment. Be careful though, it’s not a good idea to invest in the stock market 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, simply because it enhances your skills and your ability to earn a higher income in the future. In Australia, the interest on HECS loans are equal to inflation which clearly makes them a very appealing option.

Credit cards

Credit cards are often the worst type of debt an individual can have. Credit card debts reveals to financial institutions that you have poor financial habits because the interest rates are exceedingly high and you have nothing in value to show for your investment. Folks with credit card debts usually have issues in obtaining future credit from lending 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 purchase a car, it immediately decreases in value when you drive it out of the car dealership. The same applies to consumer goods such as flat screen TVs, because you are effectively paying interest for something that depreciates in value very quickly.

Borrowing to repay debt

If you end up in a position where you have to obtain a loan to repay existing debt, it’s best to seek financial guidance immediately. This kind of borrowing will only result in further money problems, and the sooner you act, the more solutions will be available to you to resolve the issue. If you end up dealing with a mountain of debt, contact the professionals at Bankruptcy Advice Perth on 1300 879 867, or alternatively visit our website for further information: www.bankruptcy-advice.com.au/perth

 

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