For most Australian adults, debt is a part of our day-to-day lives. Whether or not you want to advance your skills by earning a degree, buy a home for your family, or purchase a car so your family has transportation, securing a loan is very common simply because we don’t have enough money to pay for these expenses upfront. It seems that most people gets a loan at one point or another, so what’s the concern?
The concern is that a lot of individuals don’t realise the difference between good debt and bad debt, and consequently, they take on too much bad debt which can produce significant financial problems in the coming years. 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. As time go on, your credit report will have a substantial influence on your borrowing abilities, so paying your bills on time and not defaulting on any loans is vital, along with keeping a healthy balance between good debt and bad debt.
Each time you make an application for credit, your creditor will check your credit report to assess your financial history and then figure out whether they’ll approve your loan. Too much bad debt on your credit report will be viewed detrimentally by loan providers, as it showcases poor financial decisions and behaviours. To make certain that you maintain healthy financial practices, it’s crucial that you grasp the difference between good debt and bad debt.
What’s the difference?
The difference between good debt and bad debt is pretty straightforward. Good debt is usually an investment that will increase in value with time and will assist you in developing wealth or providing long-term income. On the contrary, 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 provides some examples of each of these types of debts.
The price of land has traditionally increased in time, so securing a home loan is considered a good debt because the value of your property will increase over 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 home can double or triple during the life of your loan.
Securing a loan to invest in the stock exchange is also considered good debt considering that the returns on the stock exchange are historically favourable. Lenders usually view stock market loans as good debt because you are striving to improve your wealth with time through a stable investment. Be careful though, it’s not a good idea to invest in the stock exchange 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, because it increases 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 enticing option.
Credit cards are commonly the worst type of debt a person can have. Credit card debts displays to loan providers that you have poor financial habits because the interest rates are incredibly high and you have nothing in value to show for your investment. People with credit card debts typically have challenges in acquiring future credit from financial institutions.
Vehicles and consumer goods
Another kind 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 effectively paying interest for something that depreciates in value very quickly.
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 kind of borrowing will only result in further money problems, and the sooner you act, the more solutions will be available to you to resolve the issue. If you find yourself dealing with a mountain of debt, talk to the professionals at Bankruptcy Experts Toowoomba on 1300 795 575, or alternatively visit our website for additional information: Bankruptcy Toowoomba