For a lot of Australian adults, debt is a part of our day-to-day lives. Regardless of whether you intend to enhance your skills by earning a degree, invest in a home for your family, or buy a car so your family has transportation, taking out 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 problem?
The issue is that a lot of people don’t grasp the difference between good debt and bad debt, and as a result, they take on too much bad debt which can lead to major financial problems down the road. Not all loans are created equal, and typically you’ll find an enormous difference between your credit card interest rates and your mortgage interest rates. Over time, your credit report will have a vital influence on your borrowing capacity, so paying your bills on time and not defaulting on any loans is essential, coupled with keeping a healthy balance between good debt and bad debt.
Each time you apply for credit, your lender will review your credit report to evaluate 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 creditors, as it showcases poor financial decisions and behaviours. To ensure that you maintain healthy financial practices, 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 frequently an investment that will increase in value in time and will help you in developing wealth or providing long-term income. Meanwhile, bad debt commonly decreases in value quickly and does not add any value to your wealth or earn a long-term return. To give you some idea, the following offers some examples of each of these types of debts.
The price of property has traditionally increased over time, so acquiring a mortgage is considered a good debt because the value of your land will increase over time. Likewise, home loans normally have low interest rates and a long term, normally 20 to 30 years, which suggests that the value of your home can double or triple during the life of your loan.
Obtaining a loan to invest in the stock market is also regarded as good debt because the returns on the stock exchange are historically favourable. Lending institutions often view stock exchange loans as good debt because you are striving to enhance your wealth over time through a sound investment. Be careful though, it’s not a good idea to invest in the stock exchange unless you have a sufficient amount of knowledge.
Another kind of good debt is investing in your education, whether it be university or a trade, because it increases your skills and your capability 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 are generally the worst type of debt a person can have. Credit card debts illustrates 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. Individuals with credit card debts generally have complications in acquiring future credit from loan providers.
Vehicles and consumer goods
Another kind of bad debt is loans for cars and other consumer goods. When you obtain a loan to buy 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 effectively paying interest for something that depreciates in value very fast.
Borrowing to repay debt
If you find yourself in a situation where you need to take out a loan to repay existing debt, it’s best to seek financial assistance immediately. This kind of borrowing will only produce 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, consult with the specialists at Bankruptcy Experts Dubbo on 1300 795 575, or alternatively visit our website for additional information: www.bankruptcyexpertsdubbo.com.au