For many Australian adults, debt is a part of our everyday lives. Whether or not you want to enhance your skills by obtaining a degree, purchase 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 expenses upfront. It appears that most people secures a loan at one point or another, so what’s the concern?
The trouble is that a lot of people don’t realise the difference between good debt and bad debt, and as a result, they take on too much bad debt which can bring about significant 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. As time go on, your credit report will have a significant effect on your borrowing abilities, so paying your bills on time and not defaulting on any loans is essential, together with keeping a healthy balance between good debt and bad debt.
Each time you apply for credit, your financial institution will review your credit report to evaluate your financial history and then figure out whether they’ll approve your loan. Too much bad debt on your credit report will be viewed adversely by loan providers, as it displays poor financial decisions and behaviours. To ensure that you maintain healthy financial habits, it’s crucial that you understand 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 generally an investment that will increase in value over time and will assist you in developing wealth or providing long-term income. Meanwhile, bad debt frequently decreases in value quickly and does not add any value to your wealth or create 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 historically increased in time, so obtaining a mortgage is considered a good debt because the value of your land will increase in time. Likewise, home loans commonly 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 deemed to be good debt because the returns on the stock exchange are traditionally favourable. Lenders generally view stock exchange loans as good debt because you are trying 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 an adequate amount of knowledge.
Another kind of good debt is investing in your education, whether it be university or a trade, simply because it increases 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 typically the worst type of debt a person can have. Credit card debts illustrates to lenders that you have poor financial habits because the interest rates are exceedingly high and you have nothing in value to show for your investment. People 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 cars and other consumer goods. When you secure a loan to buy a car, it immediately 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 effectively paying interest for something that depreciates in value very fast.
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 type of borrowing will only produce further money problems, and the sooner you act, the more alternatives will be available to you to resolve the issue. If you find yourself dealing with a mountain of debt, get in touch with the professionals at Bankruptcy Melbourne on 1300 879 867, or alternatively visit our website for further information: Bankruptcy Melbourne