For a lot of Australian adults, debt is a part of our daily lives. Regardless if you want to advance your skills by obtaining a degree, buy a property for your family, or purchase a car so your family has transport, getting a loan is very common simply because we don’t have sufficient money to pay for these costs upfront. It seems that most people gets a loan at one point or another, so what’s the issue?
The trouble is that lots 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 result in considerable financial problems down the road. Not all loans are created equal, and commonly you’ll find a huge difference between your credit card interest rates and your mortgage interest rates. As time go on, your credit report will have a great impact on your borrowing capabilities, so paying your bills on time and not defaulting on any loans is integral, in conjunction with keeping a healthy balance between good debt and bad debt.
Each time you request a line of credit, your lender will inspect your credit report to determine your financial history and then determine whether they’ll authorise your loan. Too much bad debt on your credit report will be viewed negatively by lending institutions, as it showcases poor financial decisions and behaviours. To make sure that you maintain healthy financial habits, it’s crucial that you have knowledge of 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 usually an investment that will increase in value over time and will assist you in creating wealth or providing long-term income. Meanwhile, bad debt frequently decreases in value rapidly and does not add any value to your wealth or create a long-term return. To give you some insight, the following provides some examples of each of these types of debts.
The price of land has historically increased with time, so acquiring a home loan is considered a good debt because the value of your property will increase in time. In addition, 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.
Obtaining a loan to invest in the stock exchange is also deemed to be good debt considering that the returns on the stock market are historically favourable. Loan providers normally view stock exchange loans as good debt because you are aiming to boost your wealth in time through a firm investment. Be careful though, it’s not wise to invest in the stock market unless you have an adequate amount of knowledge.
Another kind of good debt is investing in your education, whether it be university or a trade, given that it boosts your skills and your capacity 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 attractive option.
Credit cards are typically the worst type of debt an individual can have. Credit card debts demonstrates to lending institutions that you have poor financial habits because the interest rates are incredibly high and you have nothing in value to show for your investment. Folks with credit card debts generally have complications in obtaining future credit from loan providers.
Vehicles and consumer goods
Another kind of bad debt is loans for vehicles and other consumer goods. When you obtain 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 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 obtain a loan to repay existing debt, it’s best to seek financial support as quickly as possible. This type of borrowing will only cause further money problems, and the sooner you act, the more choices will be available to you to resolve the issue. If you end up facing a mountain of debt, speak with the specialists at Bankruptcy Experts Coffs Harbour on 1300 795 575, or alternatively visit our website for further information: www.bankruptcyexpertscoffsharbour.com.au