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- June 25, 2018
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For most Australian adults, debt is a part of our daily lives. Regardless if you wish to advance your skills by earning a degree, buy a property for your family, or buy a vehicle so your family has transportation, securing 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 problem is that a lot of folks don’t appreciate the difference between good debt and bad debt, and consequently, they take on too much bad debt which can bring on significant financial problems in the coming years. Not all loans are created equal, and normally you’ll find an incredible difference between your credit card interest rates and your mortgage interest rates. Eventually, your credit report will have a meaningful influence on your borrowing capabilities, so paying your bills on time and not defaulting on any loans is essential, alongside keeping a healthy balance between good debt and bad debt.
Each time you make an application for credit, your loan provider will check your credit report to evaluate your financial history and then make a decision whether they’ll approve your loan. Too much bad debt on your credit report will be viewed negatively by financial institutions, as it reveals poor financial decisions and behaviours. To make certain that you maintain healthy financial habits, it’s imperative 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 fairly straightforward. Good debt is commonly an investment that will increase in value over time and will assist you in creating wealth or providing long-term income. On the contrary, bad debt commonly decreases in value rapidly 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 property has historically increased over time, so securing a home loan is considered a good debt because the value of your land will increase in time. Likewise, mortgages largely have low interest rates and a long term, normally 20 to 30 years, which suggests that the value of your land can double or triple during the life of your loan.
Securing a loan to invest in the stock exchange is also deemed to be good debt considering that the returns on the stock market are historically favourable. Financial institutions often view stock exchange loans as good debt because you are striving to increase your wealth in 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 type of good debt is investing in your education, whether it be university or a trade, because it improves 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 usually the worst type of debt an individual can have. Credit card debts displays to lenders 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 generally have challenges in acquiring future credit from lenders.
Vehicles and consumer goods
Another type of bad debt is loans for vehicles and other consumer goods. When you obtain 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 effectively paying interest for something that depreciates in value very quickly.
Borrowing to repay debt
If you find yourself in a situation where you need to take out a loan to repay existing debt, it’s best to seek financial advice immediately. This kind of borrowing will only lead to further money problems, and the sooner you act, the more solutions will be available to you to resolve the issue. If you end up dealing with a mountain of debt, get in touch with the professionals at Bankruptcy Experts Gladstone on 1300 795 575, or alternatively visit our website for additional information: www.bankruptcyexpertsgladstone.com.au