For most Australian adults, debt is a part of our day-to-day lives. Regardless if you wish to advance your skills by earning a degree, buy a home for your family, or buy a car so your family has transportation, taking out a loan is very common simply because we don’t have enough money to pay for these expenses upfront. It seems that everybody takes out a loan at one point or another, so what’s the problem?
The trouble is that a lot of folks don’t understand the difference between good debt and bad debt, and consequently, they take on too much bad debt which can bring about major financial problems down the road. Not all loans are created equal, and normally you’ll discover a colossal difference between your credit card interest rates and your home loan interest rates. With time, your credit report will have a serious impact on your borrowing capacity, so paying your bills on time and not defaulting on any loans is vital, alongside keeping a healthy balance between good debt and bad debt.
Each time you apply for credit, your lending institution will review your credit report to determine your financial history and then figure out whether they’ll authorise your loan. Too much bad debt on your credit report will be viewed detrimentally by creditors, as it exposes poor financial decisions and behaviours. To ensure that you maintain healthy financial habits, it’s critical that you are aware of 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 usually an investment that will increase in value over time and will assist you in developing wealth or providing long-term income. On the contrary, bad debt typically 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 offers some examples of each of these types of debts.
The price of land has traditionally increased in time, so acquiring a mortgage is considered a good debt because the value of your property will increase with time. At the same time, home loans generally have low interest rates and a long term, normally 20 to 30 years, which shows 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 exchange is also regarded as good debt considering that the returns on the stock market are traditionally favourable. Financial institutions generally view stock exchange loans as good debt because you are attempting to increase your wealth over 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 type of good debt is investing in your education, whether it be university or a trade, because it enhances 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 enticing option.
Credit cards are commonly the worst type of debt an individual can have. Credit card debts illustrates to loan providers 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 commonly have challenges in securing future credit from lenders.
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 car, it instantly 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 essentially paying interest for something that depreciates in value very quickly.
Borrowing to repay debt
If you find yourself in a situation where you have to get a loan to repay existing debt, it’s best to seek financial guidance as quickly as possible. This type of borrowing will only generate 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, get in contact with the specialists at Bankruptcy Experts Kalgoorlie on 1300 795 575, or alternatively visit our website for further information: www.bankruptcyexpertskalgoorlie.com.au