For a lot of Australian adults, debt is a part of our day-to-day lives. Regardless if you want to enhance your skills by obtaining a degree, purchase a home for your family, or purchase a vehicle so your family has transport, securing a loan is very common simply because we don’t have enough money to pay for these expenditures upfront. It seems that everyone gets a loan at one point or another, so what’s the problem?
The concern is that a lot of individuals don’t recognise the difference between good debt and bad debt, and as a result, they take on too much bad debt which can lead to substantial financial problems in the coming years. Not all loans are created equal, and commonly you’ll discover a vast difference between your credit card interest rates and your mortgage interest rates. With time, your credit report will have a notable influence on your borrowing capabilities, 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 request a line of credit, your financial institution will inspect your credit report to determine your financial history and then make a decision whether they’ll authorise your loan. Too much bad debt on your credit report will be viewed adversely by financial institutions, as it exhibits poor financial decisions and behaviours. To make certain that you maintain healthy financial habits, it’s imperative 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 in time and will support you in generating wealth or providing long-term income. Meanwhile, bad debt frequently decreases in value rapidly and does not add any value to your wealth or produce a long-term return. To give you some understanding, the following offers some examples of each of these types of debts.
The price of land has traditionally increased over time, so securing a home loan is considered a good debt because the value of your property will increase over time. At the same time, home loans typically have low interest rates and a long term, normally 20 to 30 years, which shows that the value of your land can double or triple during the life of your loan.
Obtaining a loan to invest in the stock exchange is also regarded as good debt given that the returns on the stock exchange are traditionally favourable. Creditors usually view stock market loans as good debt because you are trying to enhance 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 type of good debt is investing in your education, whether it be university or a trade, simply because 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 commonly the worst type of debt an individual can have. Credit card debts reveals 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. People with credit card debts commonly have complications in securing future credit from financial institutions.
Cars 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 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 essentially paying interest for something that depreciates in value very fast.
Borrowing to repay debt
If you find yourself in a position where you need to secure a loan to repay existing debt, it’s best to seek financial support as quickly as possible. This type of borrowing will only generate further money problems, and the sooner you act, the more solutions will be available to you to resolve the issue. If you find yourself facing a mountain of debt, contact the professionals at Bankruptcy Experts Rockhampton on 1300 795 575, or alternatively visit our website for further information: Bankruptcy Rockhampton