For the majority of Australian adults, debt is a part of our day-to-day lives. Regardless if you would like to advance your skills by obtaining a degree, invest in a property for your family, or buy a vehicle so your family has transport, getting a loan is very common simply because we don’t have enough money to pay for these expenses upfront. It seems that everybody gets a loan at one point or another, so what’s the issue?
The concern is that lots of people don’t recognise the difference between good debt and bad debt, and consequently, they take on too much bad debt which can generate major financial problems in the future. Not all loans are created equal, and usually you’ll discover a tremendous difference between your credit card interest rates and your home loan interest rates. Gradually, your credit report will have a substantial impact on your borrowing capacity, so paying your bills on time and not defaulting on any loans is important, alongside keeping a healthy balance between good debt and bad debt.
Each time you make an application for credit, your lender will examine your credit report to analyse your financial history and then determine whether they’ll endorse your loan. Too much bad debt on your credit report will be viewed negatively by financial institutions, as it reveals poor financial decisions and behaviours. To make sure that you maintain healthy financial habits, it’s imperative that you understand 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 assist you in generating wealth or providing long-term income. However, bad debt usually decreases in value quickly and does not add any value to your wealth or earn a long-term return. To give you some insight, the following gives some examples of each of these types of debts.
The price of land has traditionally increased with time, so acquiring a home loan is considered a good debt because the value of your land will increase over time. At the same time, home loans usually have low interest rates and a long term, normally 20 to 30 years, which shows that the value of your land can double or triple during the life of your loan.
Obtaining a loan to invest in the stock exchange is also regarded as good debt since the returns on the stock market are traditionally favourable. Loan providers normally view stock exchange loans as good debt because you are aiming to boost your wealth in time through a solid investment. Be careful though, it’s not wise to invest in the stock exchange unless you have an acceptable amount of knowledge.
Another type of good debt is investing in your education, whether it be university or a trade, since it enhances your skills and your potential 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 enticing option.
Credit cards are generally the worst type of debt an individual can have. Credit card debts displays to financial institutions that you have poor financial habits because the interest rates are exceptionally high and you have nothing in value to show for your investment. Folks with credit card debts often have troubles in securing future credit from loan providers.
Cars and consumer goods
Another type of bad debt is loans for vehicles and other consumer goods. When you get a loan to buy a vehicle, it immediately decreases in value when you drive it out of the dealership. The same applies to consumer goods like flat screen TVs, because you are basically paying interest for something that depreciates in value very fast.
Borrowing to repay debt
If you end up in a position where you need to obtain a loan to repay existing debt, it’s best to seek financial support as quickly as possible. This kind of borrowing will only bring on further money problems, and the sooner you act, the more options will be available to you to resolve the issue. If you find yourself dealing with a mountain of debt, consult with the professionals at Bankruptcy Experts Lismore on 1300 795 575, or alternatively visit our website for more information: www.bankruptcyexpertslismore.com.au