For the majority of Australian adults, debt is a part of our daily lives. Whether or not you want to further your skills by earning a degree, buy a property 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 expenses upfront. It seems that most people obtains a loan at one point or another, so what’s the problem?
The concern is that lots of people don’t recognise the difference between good debt and bad debt, and as a result, they take on too much bad debt which can lead to serious financial problems down the road. Not all loans are created equal, and generally you’ll discover an extensive difference between your credit card interest rates and your mortgage interest rates. In time, your credit report will have a considerable impact on your borrowing capacity, so paying your bills on time and not defaulting on any loans is very important, together with keeping a healthy balance between good debt and bad debt.
Each time you request a line of credit, your loan provider will review your credit report to analyse your financial history and then decide whether they’ll endorse your loan. Too much bad debt on your credit report will be viewed detrimentally by loan providers, as it reveals poor financial decisions and behaviours. To ensure that you maintain healthy financial habits, it’s crucial that you grasp 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 normally an investment that will increase in value with time and will support you in creating wealth or providing long-term income. Conversely, bad debt primarily decreases in value rapidly and does not add any value to your wealth or generate a long-term return. To give you some knowledge, the following offers some examples of each of these types of debts.
The price of property has historically increased in time, so securing a mortgage is considered a good debt because the value of your property will increase with time. On top of that, home loans typically have low interest rates and a long term, normally 20 to 30 years, which shows that the value of your home can double or triple during the life of your loan.
Getting a loan to invest in the stock exchange is also regarded as good debt given that the returns on the stock exchange are historically favourable. Loan providers often view stock exchange loans as good debt because you are attempting to improve your wealth in time through a firm investment. Be careful though, it’s not a good idea to invest in the stock exchange unless you have an acceptable amount of knowledge.
Another kind of good debt is investing in your education, whether it be university or a trade, simply because it boosts 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 attractive option.
Credit cards are usually the worst type of debt an individual can have. Credit card debts shows to lenders that you have poor financial habits because the interest rates are remarkably high and you have nothing in value to show for your investment. People with credit card debts often have challenges in acquiring future credit from financial institutions.
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 vehicle, it instantly decreases in value when you drive it out of the car dealership. The same applies to consumer goods like flat screen TVs, because you are effectively paying interest for something that depreciates in value very rapidly.
Borrowing to repay debt
If you end up in a situation where you need to obtain a loan to repay existing debt, it’s best to seek financial guidance as soon as possible. This kind of borrowing will only lead to 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, get in touch with the professionals at Bankruptcy Experts Parramatta on 1300 795 575, or alternatively visit our website for further information: www.bankruptcyexpertsparramatta.com.au