For most Australian adults, debt is a part of our everyday lives. Regardless of whether you wish to enhance your skills by obtaining a degree, invest in a house for your family, or purchase a car so your family has transport, obtaining a loan is very common simply because we don’t have sufficient money to pay for these costs upfront. It seems that everybody gets a loan at one point or another, so what’s the concern?
The issue is that too many individuals don’t understand the difference between good debt and bad debt, and consequently, they take on too much bad debt which can lead to major financial problems in the future. Not all loans are created equal, and typically you’ll find a tremendous difference between your credit card interest rates and your mortgage interest rates. As time go on, your credit report will have a critical effect on your borrowing capacity, so paying your bills on time and not defaulting on any loans is integral, in addition to keeping a healthy balance between good debt and bad debt.
Each time you request a line of credit, your creditor will check your credit report to analyse your financial history and then decide whether they’ll approve your loan. Too much bad debt on your credit report will be viewed adversely by financial institutions, as it showcases poor financial decisions and behaviours. To make certain that you maintain healthy financial habits, it’s crucial that you have knowledge 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 frequently an investment that will increase in value over time and will help you in generating wealth or providing long-term income. Conversely, bad debt primarily decreases in value quickly and does not add any value to your wealth or generate a long-term return. To give you some insight, the following gives some examples of each of these types of debts.
The price of property has historically increased in time, so obtaining a mortgage is considered a good debt because the value of your land will increase in time. On top of that, home loans normally 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.
Obtaining a loan to invest in the stock exchange is also deemed to be good debt simply because the returns on the stock market are traditionally favourable. Lending institutions often view stock exchange loans as good debt because you are striving to boost your wealth in time through a stable investment. Be careful though, it’s not wise to invest in the stock exchange unless you have an ample amount of knowledge.
Another kind of good debt is investing in your education, whether it be university or a trade, considering that it enhances 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 appealing option.
Credit cards are normally the worst type of debt an individual can have. Credit card debts displays to lenders that you have poor financial habits because the interest rates are extremely high and you have nothing in value to show for your investment. People with credit card debts generally have problems in receiving future credit from lending institutions.
Cars and consumer goods
Another kind of bad debt is loans for cars 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 find yourself in a position where you need to obtain a loan to repay existing debt, it’s best to seek financial advice 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 dealing with a mountain of debt, reach out to the specialists at Bankruptcy Experts Maitland on 1300 795 575, or alternatively visit our website for further information: www.bankruptcyexpertsmaitland.com.au