For almost all Australian adults, debt is a part of our daily lives. Whether or not you would like to enhance your skills by obtaining a degree, purchase a home for your family, or buy a vehicle so your family has transportation, securing a loan is very common simply because we don’t have enough money to pay for these expenditures upfront. It appears that everybody gets a loan at one point or another, so what’s the problem?
The issue is that a lot of individuals 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 substantial financial problems in the future. Not all loans are created equal, and typically you’ll find a vast difference between your credit card interest rates and your home loan interest rates. Over time, your credit report will have a vital effect on your borrowing capacity, so paying your bills on time and not defaulting on any loans is vital, in addition to keeping a healthy balance between good debt and bad debt.
Each time you make an application for credit, your lender will check your credit report to analyse your financial history and then determine whether they’ll endorse your loan. Too much bad debt on your credit report will be viewed adversely by creditors, as it exhibits poor financial decisions and behaviours. To make sure that you maintain healthy financial habits, it’s imperative 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 over time and will help you in creating wealth or providing long-term income. On the other hand, bad debt usually decreases in value quickly and does not add any value to your wealth or produce a long-term return. To give you some knowledge, the following gives some examples of each of these types of debts.
The price of property has traditionally increased in time, so obtaining a mortgage is considered a good debt because the value of your property will increase in time. Likewise, mortgages typically 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 market is also regarded as good debt simply because the returns on the stock market are traditionally favourable. Lending institutions often view stock market loans as good debt because you are striving to boost your wealth in time through a firm investment. Be careful though, it’s not wise to invest in the stock exchange unless you have a sufficient amount of knowledge.
Another kind of good debt is investing in your education, whether it be university or a trade, considering that it improves your skills and your potential 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 commonly the worst type of debt an individual can have. Credit card debts shows to lending institutions 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 generally have troubles in acquiring future credit from creditors.
Vehicles and consumer goods
Another kind of bad debt is loans for vehicles 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 quickly.
Borrowing to repay debt
If you end up in a situation 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 alternatives will be available to you to resolve the issue. If you end up facing a mountain of debt, consult with the professionals at Bankruptcy Experts Shepparton on 1300 795 575, or alternatively visit our website for more information: www.bankruptcyexpertsshepparton.com.au