For many Australian adults, debt is a part of our daily lives. Whether you intend to advance your skills by earning a degree, invest in a home for your family, or purchase 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 expenses upfront. It appears that everyone secures a loan at one point or another, so what’s the issue?
The problem is that too many people don’t grasp the difference between good debt and bad debt, and consequently, they take on too much bad debt which can bring about significant financial problems down the road. Not all loans are created equal, and usually you’ll find a colossal difference between your credit card interest rates and your mortgage interest rates. With time, your credit report will have a substantial effect 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 request a line of credit, your financial institution will check your credit report to determine your financial history and then make a decision whether they’ll approve your loan. Too much bad debt on your credit report will be viewed detrimentally by financial institutions, as it showcases poor financial decisions and behaviours. To make sure that you maintain healthy financial practices, it’s critical that you understand the difference between good debt and bad debt.
What’s the difference?
The difference between good debt and bad debt is relatively straightforward. Good debt is frequently an investment that will increase in value over time and will help you in constructing wealth or providing long-term income. Meanwhile, bad debt generally decreases in value rapidly and does not add any value to your wealth or produce a long-term return. To give you some understanding, the following gives some examples of each of these types of debts.
The price of land has historically increased over time, so securing a mortgage is considered a good debt because the value of your property will increase with time. In addition, mortgages normally have low interest rates and a long term, normally 20 to 30 years, which illustrates 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 deemed to be good debt considering that the returns on the stock exchange are traditionally favourable. Lending institutions often view stock exchange loans as good debt because you are striving to enhance your wealth over time through a sound investment. Be careful though, it’s not wise to invest in the stock market unless you have an ample amount of knowledge.
Another kind of good debt is investing in your education, whether it be university or a trade, simply because it improves your skills and your potential 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 commonly the worst type of debt a person can have. Credit card debts reveals to financial institutions that you have poor financial habits because the interest rates are remarkably high and you have nothing in value to show for your investment. Folks with credit card debts frequently have challenges in acquiring future credit from creditors.
Vehicles and consumer goods
Another type of bad debt is loans for cars and other consumer goods. When you obtain a loan to buy a vehicle, 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 effectively paying interest for something that depreciates in value very fast.
Borrowing to repay debt
If you end up in a position where you need to secure a loan to repay existing debt, it’s best to seek financial guidance as soon as possible. This kind of borrowing will only generate further money problems, and the sooner you act, the more opportunities 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 Wyong on 1300 795 575, or alternatively visit our website for more information: www.bankruptcyexpertswyong.com.au