For almost all Australian adults, debt is a part of our everyday lives. Whether you would like to advance your skills by obtaining a degree, purchase a house for your family, or buy a car so your family has transportation, obtaining a loan is very common simply because we don’t have enough money to pay for these expenses upfront. It appears that everybody takes out a loan at one point or another, so what’s the issue?
The issue is that lots of people don’t appreciate the difference between good debt and bad debt, and consequently, they take on too much bad debt which can cause significant financial problems in the coming years. Not all loans are created equal, and typically you’ll find an extensive difference between your credit card interest rates and your mortgage interest rates. Over time, your credit report will have a notable influence on your borrowing capabilities, so paying your bills on time and not defaulting on any loans is very important, alongside keeping a healthy balance between good debt and bad debt.
Each time you apply for credit, your creditor will check your credit report to assess your financial history and then figure out whether they’ll endorse your loan. Too much bad debt on your credit report will be viewed negatively by loan providers, as it reveals poor financial decisions and behaviours. To make certain that you maintain healthy financial practices, it’s crucial that you grasp 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 normally an investment that will increase in value in time and will support you in constructing wealth or providing long-term income. Conversely, 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 understanding, the following gives some examples of each of these types of debts.
The price of land has traditionally increased over time, so obtaining a mortgage is considered a good debt because the value of your land will increase in time. At the same time, home loans typically have low interest rates and a long term, normally 20 to 30 years, which illustrates 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 considered good debt simply because the returns on the stock exchange are historically favourable. Loan providers generally view stock exchange loans as good debt because you are striving to boost your wealth over time through a firm investment. Be careful though, it’s not a good idea to invest in the stock market 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, because it enhances 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 appealing option.
Credit cards are often the worst type of debt a person can have. Credit card debts displays to lending institutions that you have poor financial habits because the interest rates are remarkably high and you have nothing in value to show for your investment. People with credit card debts generally have troubles in obtaining future credit from loan providers.
Vehicles and consumer goods
Another type of bad debt is loans for cars and other consumer goods. When you secure a loan to purchase a vehicle, it immediately 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 position where you have to secure a loan to repay existing debt, it’s best to seek financial support as quickly as possible. This type of borrowing will only trigger 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, reach out to the specialists at Bankruptcy Experts Geraldton on 1300 795 575, or alternatively visit our website for more information: www.bankruptcyexpertsgeraldton.com.au