For almost all Australian adults, debt is a part of our everyday lives. Regardless of whether you want to enhance your skills by obtaining a degree, buy a house for your family, or buy a car so your family has transportation, getting a loan is very common simply because we don’t have sufficient money to pay for these expenditures upfront. It appears that most people obtains a loan at one point or another, so what’s the problem?
The issue is that a lot of people don’t realise the difference between good debt and bad debt, and consequently, they take on too much bad debt which can result in major financial problems in the future. Not all loans are created equal, and commonly you’ll discover an enormous difference between your credit card interest rates and your home loan interest rates. Gradually, your credit report will have a serious effect on your borrowing capabilities, so paying your bills on time and not defaulting on any loans is essential, in addition to keeping a healthy balance between good debt and bad debt.
Each time you apply for credit, your loan provider will examine your credit report to evaluate your financial history and then determine whether they’ll endorse your loan. Too much bad debt on your credit report will be viewed detrimentally by lending institutions, as it displays poor financial decisions and behaviours. To make sure that you maintain healthy financial habits, it’s critical that you appreciate 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 usually an investment that will increase in value with time and will support you in building wealth or providing long-term income. Conversely, bad debt generally decreases in value quickly and does not add any value to your wealth or yield a long-term return. To give you some knowledge, the following offers some examples of each of these types of debts.
The price of land has historically increased in time, so acquiring a home loan is considered a good debt because the value of your property will increase with time. Also, mortgages usually 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 market is also deemed to be good debt since the returns on the stock market are traditionally favourable. Financial institutions commonly view stock market loans as good debt because you are aiming to boost your wealth in time through a sound investment. Be careful though, it’s not a good idea to invest in the stock exchange unless you have a sufficient 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 capacity 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 typically the worst type of debt an individual can have. Credit card debts illustrates to lending 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. People with credit card debts generally have challenges in obtaining future credit from lenders.
Vehicles and consumer goods
Another type of bad debt is loans for cars and other consumer goods. When you take out 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 like flat screen TVs, because you are ultimately paying interest for something that depreciates in value very fast.
Borrowing to repay debt
If you find yourself in a position where you have to secure a loan to repay existing debt, it’s best to seek financial support as quickly as possible. This type of borrowing will only cause further money problems, and the sooner you act, the more opportunities will be available to you to resolve the issue. If you end up facing a mountain of debt, talk to the specialists at Bankruptcy Experts Rockingham on 1300 795 575, or alternatively visit our website for further information: www.bankruptcyexpertsrockingham.com.au