For the majority of Australian adults, debt is a part of our day-to-day lives. Whether you intend to enhance your skills by earning a degree, invest in a house for your family, or purchase a car so your family has transport, getting a loan is very common simply because we don’t have sufficient money to pay for these expenses upfront. It appears that everyone obtains a loan at one point or another, so what’s the concern?
The trouble is that too many 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 produce serious financial problems in the coming years. 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. As time go on, your credit report will have a great influence on your borrowing capabilities, so paying your bills on time and not defaulting on any loans is essential, as well as keeping a healthy balance between good debt and bad debt.
Each time you make an application for credit, your financial institution will inspect your credit report to analyse your financial history and then decide whether they’ll approve your loan. Too much bad debt on your credit report will be viewed negatively by lenders, as it exhibits poor financial decisions and behaviours. To make certain that you maintain healthy financial habits, it’s vital that you appreciate 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 commonly an investment that will increase in value with time and will support you in building wealth or providing long-term income. On the contrary, bad debt primarily decreases in value rapidly and does not add any value to your wealth or earn a long-term return. To give you some understanding, the following gives some examples of each of these types of debts.
The price of property has historically increased in time, so acquiring a home loan is considered a good debt because the value of your property will increase over time. At the same time, mortgages generally have low interest rates and a long term, normally 20 to 30 years, which reveals 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 deemed to be good debt given that the returns on the stock exchange are historically favourable. Lending institutions commonly view stock market loans as good debt because you are trying to boost your wealth over time through a firm investment. Be careful though, it’s not wise 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, simply because it boosts your skills and your ability 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 attractive option.
Credit cards are commonly the worst type of debt an individual can have. Credit card debts shows to loan providers that you have poor financial habits because the interest rates are exceedingly high and you have nothing in value to show for your investment. People with credit card debts frequently have complications in securing future credit from financial institutions.
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 vehicle, 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 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 immediately. This type of borrowing will only lead to further money problems, and the sooner you act, the more options will be available to you to resolve the issue. If you end up dealing with a mountain of debt, talk to the professionals at Bankruptcy Experts Brisbane on 1300 795 575, or alternatively visit our website for further information: www.bankruptcyexpertsbrisbane.com.au