For most Australian adults, debt is a part of our everyday lives. Whether or not you want to advance your skills by obtaining a degree, purchase a house for your family, or purchase a car so your family has transport, obtaining 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 trouble is that too many individuals don’t understand the difference between good debt and bad debt, and consequently, they take on too much bad debt which can cause considerable financial problems in the coming years. Not all loans are created equal, and commonly 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 meaningful effect on your borrowing capacity, so paying your bills on time and not defaulting on any loans is paramount, along with keeping a healthy balance between good debt and bad debt.
Each time you make an application for credit, your lending institution will examine your credit report to evaluate your financial history and then determine whether they’ll authorise your loan. Too much bad debt on your credit report will be viewed adversely by financial institutions, as it displays poor financial decisions and behaviours. To ensure that you maintain healthy financial habits, 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 fairly straightforward. Good debt is normally an investment that will increase in value over time and will help you in constructing wealth or providing long-term income. However, bad debt typically decreases in value quickly and does not add any value to your wealth or produce a long-term return. To give you some idea, the following provides some examples of each of these types of debts.
The price of property has traditionally increased over time, so acquiring a home loan is considered a good debt because the value of your property will increase in time. Likewise, home loans largely have low interest rates and a long term, normally 20 to 30 years, which suggests that the value of your land can double or triple during the life of your loan.
Securing a loan to invest in the stock exchange is also deemed to be good debt simply because the returns on the stock exchange are historically favourable. Loan providers normally view stock exchange loans as good debt because you are trying to increase your wealth over time through a firm investment. Be careful though, it’s not wise to invest in the stock exchange unless you have a sufficient amount of knowledge.
Another kind of good debt is investing in your education, whether it be university or a trade, simply because it improves 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 appealing option.
Credit cards are typically the worst type of debt a person can have. Credit card debts illustrates to financial institutions that you have poor financial habits because the interest rates are extremely high and you have nothing in value to show for your investment. Folks with credit card debts typically have problems in acquiring future credit from lenders.
Vehicles and consumer goods
Another type 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 basically paying interest for something that depreciates in value very rapidly.
Borrowing to repay debt
If you find yourself in a situation where you need to secure a loan to repay existing debt, it’s best to seek financial support as soon as possible. This kind of borrowing will only cause further money problems, and the sooner you act, the more options will be available to you to resolve the issue. If you end up facing a mountain of debt, get in contact with the specialists at Bankruptcy Experts Gympie on 1300 795 575, or alternatively visit our website for additional information: Bankrupt Gympie