For the majority of Australian adults, debt is a part of our day-to-day lives. Regardless of whether you would like to enhance your skills by obtaining a degree, invest in a home for your family, or purchase a car so your family has transportation, obtaining a loan is very common simply because we don’t have sufficient money to pay for these costs upfront. It appears that most people gets a loan at one point or another, so what’s the issue?
The trouble 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 create significant financial problems down the road. Not all loans are created equal, and commonly you’ll find a huge difference between your credit card interest rates and your mortgage interest rates. With time, your credit report will have a meaningful effect on your borrowing abilities, so paying your bills on time and not defaulting on any loans is paramount, in addition to keeping a healthy balance between good debt and bad debt.
Each time you apply for credit, your creditor will inspect your credit report to assess 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 lending institutions, as it exposes poor financial decisions and behaviours. To make sure that you maintain healthy financial habits, it’s essential that you recognise 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 over time and will support you in building wealth or providing long-term income. Conversely, bad debt normally decreases in value quickly and does not add any value to your wealth or earn a long-term return. To give you some understanding, the following provides some examples of each of these types of debts.
The price of property has historically increased over time, so obtaining a mortgage is considered a good debt because the value of your property will increase in time. At the same time, mortgages normally 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.
Obtaining a loan to invest in the stock exchange is also regarded as good debt since the returns on the stock market are traditionally favourable. Loan providers often view stock exchange loans as good debt because you are aiming to boost your wealth in time through a stable investment. Be careful though, it’s not wise to invest in the stock exchange 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, because it increases your skills and your capability 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 attractive option.
Credit cards are typically the worst type of debt an individual can have. Credit card debts illustrates to creditors that you have poor financial habits because the interest rates are remarkably high and you have nothing in value to show for your investment. Individuals with credit card debts often have problems in receiving future credit from lending institutions.
Cars and consumer goods
Another kind of bad debt is loans for vehicles and other consumer goods. When you take out a loan to buy 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 situation where you need to secure a loan to repay existing debt, it’s best to seek financial guidance immediately. This type of borrowing will only lead to 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, speak with the specialists at Bankruptcy Experts Hervey Bay on 1300 795 575, or alternatively visit our website for more information: www.bankruptcyexpertsherveybay.com.au