For many Australian adults, debt is a part of our daily lives. Whether you want to further your skills by obtaining a degree, invest in a property for your family, or purchase a car so your family has transport, securing a loan is very common simply because we don’t have sufficient money to pay for these expenses upfront. It appears that everyone gets a loan at one point or another, so what’s the problem?
The trouble is that too many people don’t have knowledge of the difference between good debt and bad debt, and as a result, they take on too much bad debt which can bring about substantial financial problems in the coming years. Not all loans are created equal, and normally you’ll discover a colossal difference between your credit card interest rates and your mortgage interest rates. Gradually, your credit report will have a notable impact on your borrowing abilities, 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 lender will examine your credit report to determine your financial history and then make a decision whether they’ll authorise your loan. Too much bad debt on your credit report will be viewed adversely by lenders, as it displays poor financial decisions and behaviours. To ensure that you maintain healthy financial habits, it’s vital 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 pretty straightforward. Good debt is normally an investment that will increase in value in time and will help you in creating wealth or providing long-term income. Conversely, bad debt usually decreases in value quickly and does not add any value to your wealth or produce a long-term return. To give you some insight, the following offers some examples of each of these types of debts.
The price of land has historically increased with time, so acquiring a mortgage is considered a good debt because the value of your land will increase over time. Additionally, home loans usually have low interest rates and a long term, normally 20 to 30 years, which reveals that the value of your home can double or triple during the life of your loan.
Taking out a loan to invest in the stock exchange is also regarded as good debt since the returns on the stock exchange are traditionally favourable. Creditors commonly view stock exchange loans as good debt because you are attempting to enhance your wealth over time through a firm investment. Be careful though, it’s not a good idea to invest in the stock exchange unless you have a sufficient amount of knowledge.
Another kind of good debt is investing in your education, whether it be university or a trade, because it enhances your skills and your capability to earn a higher income down the road. In Australia, the interest on HECS loans are equal to inflation which clearly makes them a very enticing option.
Credit cards are usually the worst type of debt an individual can have. Credit card debts displays 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. People with credit card debts usually have complications in receiving future credit from lenders.
Cars and consumer goods
Another type of bad debt is loans for cars and other consumer goods. When you take out a loan to purchase a car, 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 essentially paying interest for something that depreciates in value very quickly.
Borrowing to repay debt
If you find yourself in a situation where you have to get a loan to repay existing debt, it’s best to seek financial support as quickly as possible. This type of borrowing will only lead to further money problems, and the sooner you act, the more opportunities will be available to you to resolve the issue. If you end up facing a mountain of debt, speak to the specialists at Bankruptcy Experts Penrith on 1300 795 575, or alternatively visit our website for more information: www.bankruptcyexpertspenrith.com.au