For many Australian adults, debt is a part of our day-to-day lives. Regardless of whether you want to further your skills by earning a degree, invest in a property for your family, or purchase a vehicle so your family has transport, getting a loan is very common simply because we don’t have sufficient money to pay for these expenditures upfront. It seems that most people takes out a loan at one point or another, so what’s the issue?
The problem is that a lot of individuals don’t recognise the difference between good debt and bad debt, and consequently, they take on too much bad debt which can bring about major financial problems down the road. Not all loans are created equal, and generally you’ll find a massive difference between your credit card interest rates and your mortgage interest rates. In time, your credit report will have a vital influence on your borrowing capabilities, so paying your bills on time and not defaulting on any loans is critical, in conjunction with keeping a healthy balance between good debt and bad debt.
Each time you make an application for credit, your creditor will inspect your credit report to assess your financial history and then determine whether they’ll approve your loan. Too much bad debt on your credit report will be viewed detrimentally by lending institutions, as it exposes poor financial decisions and behaviours. To ensure that you maintain healthy financial habits, it’s imperative 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 fairly straightforward. Good debt is commonly an investment that will increase in value with time and will assist you in building wealth or providing long-term income. On the other hand, bad debt commonly decreases in value quickly and does not add any value to your wealth or produce a long-term return. To give you some knowledge, the following offers some examples of each of these types of debts.
The price of land has traditionally increased over time, so securing a home loan is considered a good debt because the value of your property will increase with time. At the same time, mortgages commonly have low interest rates and a long term, normally 20 to 30 years, which illustrates that the value of your property can double or triple during the life of your loan.
Securing a loan to invest in the stock exchange is also deemed to be good debt given that the returns on the stock market are traditionally favourable. Lenders usually view stock exchange loans as good debt because you are striving to improve your wealth with time through a solid investment. Be careful though, it’s not wise to invest in the stock market unless you have an adequate amount of knowledge.
Another type of good debt is investing in your education, whether it be university or a trade, considering 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 usually the worst type of debt a person can have. Credit card debts displays to lenders that you have poor financial habits because the interest rates are incredibly high and you have nothing in value to show for your investment. Folks with credit card debts usually have troubles in securing future credit from financial institutions.
Cars and consumer goods
Another type of bad debt is loans for vehicles and other consumer goods. When you get a loan to purchase a vehicle, it immediately 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 ultimately paying interest for something that depreciates in value very rapidly.
Borrowing to repay debt
If you end up in a position where you have to take out a loan to repay existing debt, it’s best to seek financial assistance as soon as possible. This type of borrowing will only trigger further money problems, and the sooner you act, the more opportunities will be available to you to resolve the issue. If you end up dealing with a mountain of debt, talk with the specialists at Bankruptcy Experts Townsville on 1300 795 575, or alternatively visit our website for further information: www.bankruptcyexpertstownsville.com.au