For a lot of Australian adults, debt is a part of our everyday lives. Regardless of whether you intend to advance your skills by earning a degree, purchase a home for your family, or buy a vehicle so your family has transport, getting a loan is very common simply because we don’t have enough money to pay for these expenses upfront. It seems that everyone secures a loan at one point or another, so what’s the problem?
The problem is that a lot of folks don’t understand the difference between good debt and bad debt, and as a result, they take on too much bad debt which can cause significant financial problems down the road. Not all loans are created equal, and normally you’ll find an incredible difference between your credit card interest rates and your home loan interest rates. Gradually, your credit report will have a substantial effect on your borrowing capabilities, so paying your bills on time and not defaulting on any loans is integral, together with keeping a healthy balance between good debt and bad debt.
Each time you make an application for credit, your creditor 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 shows poor financial decisions and behaviours. To make sure that you maintain healthy financial practices, it’s critical that you appreciate 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 in time and will assist you in creating wealth or providing long-term income. Conversely, bad debt commonly decreases in value rapidly and does not add any value to your wealth or create a long-term return. To give you some knowledge, the following offers some examples of each of these types of debts.
The price of property has historically increased with time, so acquiring a home loan is considered a good debt because the value of your property will increase with time. Likewise, home loans usually have low interest rates and a long term, normally 20 to 30 years, which reveals that the value of your property 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 since the returns on the stock exchange are traditionally favourable. Financial institutions commonly view stock market loans as good debt because you are aiming to improve your wealth with time through a sound investment. Be careful though, it’s not a good idea to invest in the stock exchange unless you have an acceptable amount of knowledge.
Another kind of good debt is investing in your education, whether it be university or a trade, since it boosts your skills and your potential 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 attractive option.
Credit cards are usually the worst type of debt an individual can have. Credit card debts illustrates 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 usually have troubles in obtaining 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 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 fast.
Borrowing to repay debt
If you end up in a position where you have 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 bring on further money problems, and the sooner you act, the more choices will be available to you to resolve the issue. If you end up dealing with a mountain of debt, phone the specialists at Bankruptcy Experts Taree on 1300 795 575, or alternatively visit our website for additional information: www.bankruptcyexpertstaree.com.au