For many Australian adults, debt is a part of our daily lives. Whether you intend to further your skills by obtaining a degree, purchase a home 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 everyone gets a loan at one point or another, so what’s the concern?
The trouble is that a lot of individuals don’t recognise the difference between good debt and bad debt, and consequently, they take on too much bad debt which can lead to considerable financial problems in the future. Not all loans are created equal, and commonly you’ll find a massive difference between your credit card interest rates and your mortgage interest rates. With time, your credit report will have a vital impact on your borrowing capacity, so paying your bills on time and not defaulting on any loans is very important, coupled with keeping a healthy balance between good debt and bad debt.
Each time you make an application for credit, your financial institution will review 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 detrimentally by financial institutions, as it displays poor financial decisions and behaviours. To make sure that you maintain healthy financial habits, it’s important that you grasp 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 typically an investment that will increase in value over time and will support you in generating wealth or providing long-term income. However, bad debt normally 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 gives some examples of each of these types of debts.
The price of land has historically increased in time, so acquiring a mortgage is considered a good debt because the value of your property will increase with time. In addition, mortgages generally have low interest rates and a long term, normally 20 to 30 years, which illustrates that the value of your property can double or triple during the life of your loan.
Securing a loan to invest in the stock exchange is also considered good debt considering that the returns on the stock market are traditionally favourable. Financial institutions often view stock exchange loans as good debt because you are attempting to boost your wealth in time through a sound investment. Be careful though, it’s not wise to invest in the stock market unless you have an ample amount of knowledge.
Another kind of good debt is investing in your education, whether it be university or a trade, simply 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 attractive option.
Credit cards are ordinarily 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 exceedingly high and you have nothing in value to show for your investment. Individuals with credit card debts frequently have challenges in acquiring future credit from creditors.
Vehicles and consumer goods
Another type of bad debt is loans for cars and other consumer goods. When you take out 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 such as flat screen TVs, because you are ultimately paying interest for something that depreciates in value very quickly.
Borrowing to repay debt
If you end up in a situation where you need to take out a loan to repay existing debt, it’s best to seek financial assistance as quickly as possible. This type of borrowing will only result in further money problems, and the sooner you act, the more choices will be available to you to resolve the issue. If you find yourself dealing with a mountain of debt, talk to the professionals at Bankruptcy Experts Wangaratta on 1300 795 575, or alternatively visit our website for further information: www.bankruptcyexpertswangaratta.com.au