The Difference Between Good Debt and Bad Debt – What You Need To Understand
For the majority of Australian adults, debt is a part of our daily lives. Whether or not you wish to advance your skills by earning a degree, purchase a house for your family, or buy a car so your family has transport, securing a loan is very common simply because we don’t have enough money to pay for these expenses upfront. It appears that everyone gets a loan at one point or another, so what’s the issue?
The problem is that lots of individuals don’t understand the difference between good debt and bad debt, and consequently, they take on too much bad debt which can bring about significant financial problems in the coming years. Not all loans are created equal, and usually you’ll find a tremendous difference between your credit card interest rates and your mortgage interest rates. Over time, your credit report will have a significant impact on your borrowing capacity, so paying your bills on time and not defaulting on any loans is vital, coupled with keeping a healthy balance between good debt and bad debt.
Each time you apply for credit, your lender will check your credit report to determine your financial history and then determine whether they’ll approve your loan. Too much bad debt on your credit report will be viewed negatively by financial institutions, as it displays poor financial decisions and behaviours. To make certain that you maintain healthy financial habits, it’s vital that you comprehend 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 normally an investment that will increase in value in time and will assist you in developing wealth or providing long-term income. Conversely, bad debt frequently decreases in value quickly and does not add any value to your wealth or yield a long-term return. To give you some insight, the following offers some examples of each of these types of debts.
The price of land has historically increased in time, so obtaining a home loan is considered a good debt because the value of your property will increase with time. Furthermore, home loans usually 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 given that the returns on the stock exchange are historically favourable. Financial institutions often view stock exchange loans as good debt because you are trying 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 acceptable amount of knowledge.
Another type of good debt is investing in your education, whether it be university or a trade, given that it increases 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 appealing option.
Credit cards are ordinarily the worst type of debt an individual can have. Credit card debts shows to financial 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 commonly have problems 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 take out 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 basically paying interest for something that depreciates in value very quickly.
Borrowing to repay debt
If you find yourself in a position where you need to take out a loan to repay existing debt, it’s best to seek financial advice as soon as possible. This kind of borrowing will only trigger 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, speak with the specialists at Bankruptcy Experts Canberra on 1300 795 575, or alternatively visit our website for additional information: www.bankruptcyexpertscanberra.com.au