For the majority of Australian adults, debt is a part of our day-to-day lives. Whether you would like to advance your skills by obtaining a degree, purchase a property for your family, or purchase a car so your family has transportation, obtaining a loan is very common simply because we don’t have sufficient money to pay for these expenditures upfront. It appears that everyone secures a loan at one point or another, so what’s the issue?
The problem is that lots of folks don’t realise the difference between good debt and bad debt, and consequently, they take on too much bad debt which can generate significant financial problems in the coming years. Not all loans are created equal, and usually you’ll discover a massive difference between your credit card interest rates and your mortgage interest rates. As time go on, your credit report will have a serious effect on your borrowing capacity, 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 loan provider will check your credit report to analyse your financial history and then determine whether they’ll endorse your loan. Too much bad debt on your credit report will be viewed detrimentally by lending institutions, as it showcases poor financial decisions and behaviours. To make sure that you maintain healthy financial practices, it’s critical that you understand 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 commonly an investment that will increase in value with time and will assist you in constructing wealth or providing long-term income. Conversely, bad debt usually 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 gives some examples of each of these types of debts.
The price of land has historically increased with time, so securing a home loan is considered a good debt because the value of your property will increase with time. Likewise, home loans normally 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 market is also considered good debt considering that the returns on the stock exchange are historically favourable. Lending institutions commonly view stock exchange loans as good debt because you are trying to boost your wealth in time through a sound 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, given that it enhances your skills and your capability 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 normally the worst type of debt an individual can have. Credit card debts displays to loan providers that you have poor financial habits because the interest rates are exceptionally high and you have nothing in value to show for your investment. People with credit card debts typically have problems in acquiring future credit from lenders.
Cars and consumer goods
Another kind of bad debt is loans for cars and other consumer goods. When you take out 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 ultimately paying interest for something that depreciates in value very quickly.
Borrowing to repay debt
If you end up in a situation where you need to obtain a loan to repay existing debt, it’s best to seek financial guidance as quickly 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 dealing with a mountain of debt, speak with the specialists at Bankruptcy Experts Mildura on 1300 795 575, or alternatively visit our website for additional information: www.bankruptcyexpertsmildura.com.au