For a lot of Australian adults, debt is a part of our daily lives. Whether or not you would like to advance your skills by earning a degree, purchase a house for your family, or purchase a vehicle so your family has transport, obtaining a loan is very common simply because we don’t have sufficient money to pay for these expenses upfront. It appears that everyone obtains a loan at one point or another, so what’s the issue?
The issue is that lots of individuals don’t appreciate the difference between good debt and bad debt, and as a result, they take on too much bad debt which can result in major financial problems in the coming years. Not all loans are created equal, and generally 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 major influence on your borrowing capacity, so paying your bills on time and not defaulting on any loans is very important, together with keeping a healthy balance between good debt and bad debt.
Each time you request a line of credit, your financial institution will examine your credit report to determine your financial history and then determine whether they’ll endorse your loan. Too much bad debt on your credit report will be viewed negatively by loan providers, as it showcases poor financial decisions and behaviours. To ensure that you maintain healthy financial practices, it’s important that you grasp 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 with time and will support you in developing wealth or providing long-term income. On the other hand, bad debt generally decreases in value quickly 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 property has historically increased in time, so obtaining a home loan is considered a good debt because the value of your property will increase in time. Additionally, mortgages often 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.
Obtaining a loan to invest in the stock exchange is also deemed to be good debt simply because the returns on the stock market are historically favourable. Loan providers typically view stock market loans as good debt because you are trying to improve your wealth in time through a sound investment. Be careful though, it’s not a good idea to invest in the stock market unless you have an acceptable amount of knowledge.
Another type of good debt is investing in your education, whether it be university or a trade, since 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 appealing option.
Credit cards are traditionally the worst type of debt an individual can have. Credit card debts illustrates to lenders that you have poor financial habits because the interest rates are exceedingly high and you have nothing in value to show for your investment. Folks with credit card debts often have problems in receiving future credit from lending institutions.
Vehicles and consumer goods
Another kind of bad debt is loans for cars and other consumer goods. When you secure 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 such as flat screen TVs, because you are effectively 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 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 find yourself dealing with a mountain of debt, speak with the professionals at Bankruptcy Experts Mackay on 1300 795 575, or alternatively visit our website for further information: Bankruptcy Experts Mackay