For almost all Australian adults, debt is a part of our everyday lives. Whether you intend to further your skills by earning a degree, purchase a home for your family, or purchase 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 costs upfront. It seems that everyone gets a loan at one point or another, so what’s the concern?
The problem is that a lot of people don’t understand 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 usually you’ll discover a huge difference between your credit card interest rates and your home loan interest rates. Eventually, your credit report will have a significant effect on your borrowing capacity, so paying your bills on time and not defaulting on any loans is critical, in conjunction with keeping a healthy balance between good debt and bad debt.
Each time you apply for credit, your lender will examine your credit report to assess your financial history and then determine whether they’ll authorise your loan. Too much bad debt on your credit report will be viewed adversely by lenders, as it showcases poor financial decisions and behaviours. To make sure that you maintain healthy financial habits, 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 fairly straightforward. Good debt is generally an investment that will increase in value with time and will support you in creating wealth or providing long-term income. On the contrary, bad debt generally decreases in value rapidly and does not add any value to your wealth or create 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 traditionally increased over time, so acquiring a mortgage is considered a good debt because the value of your property will increase in time. At the same time, mortgages largely 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.
Getting 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. Loan providers commonly view stock exchange loans as good debt because you are attempting to enhance your wealth in time through a firm investment. Be careful though, it’s not wise to invest in the stock market unless you have an adequate amount of knowledge.
Another type of good debt is investing in your education, whether it be university or a trade, since it increases your skills and your ability 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 traditionally the worst type of debt an individual can have. Credit card debts displays to creditors that you have poor financial habits because the interest rates are exceedingly high and you have nothing in value to show for your investment. Individuals with credit card debts commonly have troubles in securing future credit from lenders.
Cars and consumer goods
Another kind of bad debt is loans for vehicles and other consumer goods. When you get a loan to purchase a car, it instantly decreases in value when you drive it out of the dealership. The same applies to consumer goods such as flat screen TVs, because you are basically paying interest for something that depreciates in value very rapidly.
Borrowing to repay debt
If you find yourself in a situation where you have to secure a loan to repay existing debt, it’s best to seek financial assistance as soon as possible. This type of borrowing will only lead to further money problems, and the sooner you act, the more choices will be available to you to resolve the issue. If you end up dealing with a mountain of debt, talk to the specialists at Bankruptcy Experts Albury on 1300 795 575, or alternatively visit our website for additional information: www.bankruptcyexpertsalbury.com.au