For a lot of Australian adults, debt is a part of our daily lives. Regardless if you want to further your skills by obtaining a degree, invest in a house for your family, or buy a car so your family has transportation, taking out a loan is very common simply because we don’t have sufficient money to pay for these costs upfront. It appears that everybody gets a loan at one point or another, so what’s the issue?
The concern is that a lot of people don’t understand the difference between good debt and bad debt, and consequently, they take on too much bad debt which can result in major financial problems down the road. Not all loans are created equal, and generally you’ll discover a vast difference between your credit card interest rates and your home loan interest rates. Over time, your credit report will have a notable effect on your borrowing abilities, so paying your bills on time and not defaulting on any loans is vital, in conjunction with keeping a healthy balance between good debt and bad debt.
Each time you apply for credit, your loan provider will review 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 detrimentally by lending institutions, as it showcases poor financial decisions and behaviours. To make sure that you maintain healthy financial practices, it’s crucial that you comprehend 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 typically an investment that will increase in value over time and will support you in creating wealth or providing long-term income. However, bad debt normally decreases in value rapidly and does not add any value to your wealth or create a long-term return. To give you some insight, the following offers some examples of each of these types of debts.
The price of property has historically increased with time, so obtaining a mortgage is considered a good debt because the value of your land will increase over time. At the same time, mortgages typically have low interest rates and a long term, normally 20 to 30 years, which suggests 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 regarded as good debt considering that the returns on the stock exchange are historically favourable. Creditors normally view stock market loans as good debt because you are striving to enhance your wealth over time through a sound investment. Be careful though, it’s not a good idea to invest in the stock exchange unless you have an ample amount of knowledge.
Another kind of good debt is investing in your education, whether it be university or a trade, since it enhances your skills and your ability 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 illustrates to lending 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. Individuals with credit card debts commonly have issues in acquiring future credit from creditors.
Vehicles and consumer goods
Another kind of bad debt is loans for cars and other consumer goods. When you secure a loan to purchase a vehicle, it instantly decreases in value when you drive it out of the car dealership. The same applies to consumer goods like flat screen TVs, because you are basically paying interest for something that depreciates in value very fast.
Borrowing to repay debt
If you find yourself in a position where you have 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 lead to further money problems, and the sooner you act, the more options will be available to you to resolve the issue. If you end up dealing with a mountain of debt, consult with the specialists at Bankruptcy Experts Perth on 1300 795 575, or alternatively visit our website for more information: www.bankruptcyexpertsperth.com.au