For many Australian adults, debt is a part of our day-to-day lives. Whether or not you would like to enhance your skills by earning a degree, purchase a house for your family, or buy a vehicle so your family has transport, getting a loan is very common simply because we don’t have enough money to pay for these expenditures upfront. It appears that most people secures a loan at one point or another, so what’s the issue?
The issue 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 significant financial problems down the road. Not all loans are created equal, and typically you’ll find an extensive difference between your credit card interest rates and your mortgage interest rates. Gradually, your credit report will have a great effect on your borrowing capabilities, so paying your bills on time and not defaulting on any loans is critical, together with keeping a healthy balance between good debt and bad debt.
Each time you apply for credit, your lender will examine 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 lenders, as it displays poor financial decisions and behaviours. To make sure that you maintain healthy financial practices, it’s crucial that you recognise 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 typically an investment that will increase in value in time and will help you in generating wealth or providing long-term income. Conversely, bad debt primarily decreases in value quickly and does not add any value to your wealth or generate a long-term return. To give you some understanding, 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 land will increase in time. Additionally, home loans commonly have low interest rates and a long term, normally 20 to 30 years, which suggests that the value of your property can double or triple during the life of your loan.
Taking out a loan to invest in the stock market is also considered good debt considering that the returns on the stock exchange are historically favourable. Lending institutions often view stock market loans as good debt because you are attempting to enhance your wealth over time through a firm investment. Be careful though, it’s not wise to invest in the stock market unless you have an acceptable amount of knowledge.
Another kind of good debt is investing in your education, whether it be university or a trade, simply because it boosts your skills and your capacity 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 a person can have. Credit card debts reveals 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. Individuals with credit card debts commonly have problems in obtaining future credit from financial institutions.
Cars and consumer goods
Another type of bad debt is loans for cars and other consumer goods. When you obtain 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 such as flat screen TVs, because you are basically paying interest for something that depreciates in value very rapidly.
Borrowing to repay debt
If you end up in a situation where you have to obtain a loan to repay existing debt, it’s best to seek financial support as quickly as possible. This type of borrowing will only result in further money problems, and the sooner you act, the more choices will be available to you to resolve the issue. If you end up dealing with a mountain of debt, speak to the professionals at Bankruptcy Experts Gold Coast on 1300 879 867, or alternatively visit our website for additional information: www.bankruptcyexpertsgoldcoast.com.au