For almost all Australian adults, debt is a part of our daily lives. Whether or not you intend to advance your skills by earning a degree, invest in a home for your family, or buy a car so your family has transport, obtaining 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 problem?
The problem is that too many individuals don’t grasp the difference between good debt and bad debt, and consequently, they take on too much bad debt which can bring about considerable financial problems in the coming years. Not all loans are created equal, and normally you’ll discover a tremendous difference between your credit card interest rates and your home loan interest rates. As time go on, your credit report will have a notable influence on your borrowing abilities, so paying your bills on time and not defaulting on any loans is integral, along with keeping a healthy balance between good debt and bad debt.
Each time you make an application for credit, your financial institution will examine your credit report to analyse your financial history and then figure out whether they’ll endorse your loan. Too much bad debt on your credit report will be viewed detrimentally by loan providers, as it exhibits poor financial decisions and behaviours. To ensure that you maintain healthy financial practices, it’s critical 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 generally an investment that will increase in value with time and will help you in generating wealth or providing long-term income. However, bad debt typically decreases in value rapidly and does not add any value to your wealth or earn a long-term return. To give you some insight, the following provides some examples of each of these types of debts.
The price of property has historically increased in time, so acquiring a mortgage is considered a good debt because the value of your land will increase with time. In addition, home loans typically have low interest rates and a long term, normally 20 to 30 years, which indicates that the value of your property can double or triple during the life of your loan.
Obtaining a loan to invest in the stock exchange is also considered good debt simply because the returns on the stock market are historically favourable. Lending institutions typically view stock market loans as good debt because you are trying to boost your wealth in time through a firm investment. Be careful though, it’s not a good idea to invest in the stock market unless you have an ample amount of knowledge.
Another type of good debt is investing in your education, whether it be university or a trade, 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 appealing option.
Credit cards are primarily the worst type of debt an individual can have. Credit card debts displays to lenders that you have poor financial habits because the interest rates are incredibly high and you have nothing in value to show for your investment. Individuals with credit card debts typically have troubles in receiving future credit from lenders.
Cars and consumer goods
Another type of bad debt is loans for cars and other consumer goods. When you get a loan to purchase a car, it immediately decreases in value when you drive it out of the car dealership. The same applies to consumer goods like flat screen TVs, because you are basically paying interest for something that depreciates in value very quickly.
Borrowing to repay debt
If you end up in a position where you need to get a loan to repay existing debt, it’s best to seek financial assistance immediately. 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 facing a mountain of debt, call the professionals at Bankruptcy Experts Emerald on 1300 795 575, or alternatively visit our website for more information: www.bankruptcyexpertsemerald.com.au