For almost all Australian adults, debt is a part of our day-to-day lives. Regardless of whether you wish to advance your skills by obtaining a degree, buy a property for your family, or purchase a car so your family has transport, taking out 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 concern is that a lot of individuals don’t understand the difference between good debt and bad debt, and as a result, they take on too much bad debt which can lead to substantial financial problems in the future. Not all loans are created equal, and normally you’ll discover an enormous difference between your credit card interest rates and your mortgage interest rates. Eventually, your credit report will have a serious influence on your borrowing abilities, so paying your bills on time and not defaulting on any loans is very important, in addition to keeping a healthy balance between good debt and bad debt.
Each time you apply for credit, your lending institution will review your credit report to assess your financial history and then determine whether they’ll approve your loan. Too much bad debt on your credit report will be viewed negatively by creditors, as it showcases poor financial decisions and behaviours. To make certain that you maintain healthy financial practices, 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 fairly straightforward. Good debt is generally an investment that will increase in value in time and will help you in constructing wealth or providing long-term income. On the contrary, bad debt usually decreases in value rapidly and does not add any value to your wealth or generate a long-term return. To give you some insight, the following gives some examples of each of these types of debts.
The price of land has traditionally increased with time, so securing a home loan is considered a good debt because the value of your land will increase over time. Also, mortgages normally have low interest rates and a long term, normally 20 to 30 years, which shows 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 considered good debt given that the returns on the stock exchange are traditionally favourable. Financial institutions typically view stock market loans as good debt because you are aiming to improve your wealth in time through a solid investment. Be careful though, it’s not wise to invest in the stock market 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, since it boosts your skills and your capability 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 primarily the worst type of debt an individual can have. Credit card debts demonstrates to loan providers 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 frequently have troubles in securing future credit from financial institutions.
Cars 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 car dealership. The same applies to consumer goods like 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 position where you have to secure a loan to repay existing debt, it’s best to seek financial advice as soon as possible. This kind of borrowing will only cause further money problems, and the sooner you act, the more choices will be available to you to resolve the issue. If you end up facing a mountain of debt, talk with the professionals at Bankruptcy Experts Alice Springs on 1300 795 575, or alternatively visit our website for more information: www.bankruptcyexpertsalicesprings.com.au