For most Australian adults, debt is a part of our daily lives. Whether you wish to advance your skills by obtaining a degree, purchase a house for your family, or purchase a vehicle so your family has transport, securing a loan is very common simply because we don’t have sufficient money to pay for these expenditures upfront. It seems that everyone obtains a loan at one point or another, so what’s the concern?
The issue is that too many folks 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 major financial problems down the road. Not all loans are created equal, and normally you’ll find a huge difference between your credit card interest rates and your mortgage interest rates. With time, your credit report will have a notable impact on your borrowing capacity, so paying your bills on time and not defaulting on any loans is critical, coupled with keeping a healthy balance between good debt and bad debt.
Each time you make an application for credit, your loan provider will inspect your credit report to assess your financial history and then decide whether they’ll approve your loan. Too much bad debt on your credit report will be viewed detrimentally by financial institutions, as it displays poor financial decisions and behaviours. To ensure that you maintain healthy financial habits, it’s critical that you understand 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 typically an investment that will increase in value over time and will assist 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 generate a long-term return. To give you some insight, the following offers some examples of each of these types of debts.
The price of property has traditionally increased with time, so securing a home loan is considered a good debt because the value of your property will increase in time. At the same time, home loans typically 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.
Obtaining a loan to invest in the stock market is also regarded as good debt simply because the returns on the stock market are historically favourable. Lenders commonly view stock market loans as good debt because you are attempting to improve your wealth with time through a stable investment. Be careful though, it’s not a good idea to invest in the stock market 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, given that it boosts your skills and your capability 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 primarily the worst type of debt an individual can have. Credit card debts illustrates to creditors 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 often have issues in securing future credit from lending institutions.
Vehicles and consumer goods
Another kind of bad debt is loans for cars and other consumer goods. When you obtain 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 find yourself in a position where you have to take out a loan to repay existing debt, it’s best to seek financial advice as soon as possible. This type of borrowing will only cause further money problems, and the sooner you act, the more solutions will be available to you to resolve the issue. If you find yourself facing a mountain of debt, get in contact with the specialists at Bankruptcy Experts Newcastle on 1300 795 575, or alternatively visit our website for more information: www.bankruptcyexpertsnewcastle.com.au