For most Australian adults, debt is a part of our day-to-day lives. Regardless of whether you want to further your skills by obtaining a degree, purchase a home for your family, or buy 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 appears that everybody takes out a loan at one point or another, so what’s the problem?
The problem is that a lot of folks don’t recognise the difference between good debt and bad debt, and consequently, they take on too much bad debt which can lead to serious financial problems in the coming years. Not all loans are created equal, and generally you’ll discover an extensive difference between your credit card interest rates and your mortgage interest rates. As time go on, your credit report will have a vital effect on your borrowing capacity, so paying your bills on time and not defaulting on any loans is critical, as well as keeping a healthy balance between good debt and bad debt.
Each time you make an application for credit, your loan provider will examine your credit report to determine your financial history and then decide whether they’ll endorse your loan. Too much bad debt on your credit report will be viewed negatively by lending institutions, as it displays poor financial decisions and behaviours. To ensure that you maintain healthy financial practices, it’s essential that you are aware of 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 frequently an investment that will increase in value over time and will assist you in constructing wealth or providing long-term income. However, bad debt generally 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 land has traditionally increased in time, so acquiring a mortgage is considered a good debt because the value of your land will increase in time. Additionally, mortgages often 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 market is also regarded as good debt because the returns on the stock market are traditionally favourable. Lending institutions typically view stock exchange loans as good debt because you are aiming to enhance 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 type of good debt is investing in your education, whether it be university or a trade, given that it increases 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 enticing option.
Credit cards are normally the worst type of debt a person can have. Credit card debts shows to loan providers that you have poor financial habits because the interest rates are incredibly high and you have nothing in value to show for your investment. Individuals with credit card debts frequently have issues in securing future credit from creditors.
Vehicles and consumer goods
Another kind of bad debt is loans for vehicles and other consumer goods. When you obtain a loan to buy 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 end up in a situation where you need to obtain a loan to repay existing debt, it’s best to seek financial advice as quickly as possible. This kind of borrowing will only produce further money problems, and the sooner you act, the more options will be available to you to resolve the issue. If you find yourself facing a mountain of debt, speak to the professionals at Bankruptcy Experts Tamworth on 1300 795 575, or alternatively visit our website for more information: www.bankruptcyexpertstamworth.com.au