The Difference Between Good Debt and Bad Debt – What You Need To Know
For most Australian adults, debt is a part of our everyday lives. Regardless of whether you want to further your skills by obtaining a degree, invest in a house for your family, or buy a vehicle so your family has transportation, getting a loan is very common simply because we don’t have enough money to pay for these expenses upfront. It seems that most people obtains a loan at one point or another, so what’s the concern?
The concern is that lots of individuals don’t recognise the difference between good debt and bad debt, and consequently, they take on too much bad debt which can result in major financial problems down the road. Not all loans are created equal, and typically you’ll discover an extensive difference between your credit card interest rates and your mortgage interest rates. Eventually, your credit report will have a great influence on your borrowing abilities, so paying your bills on time and not defaulting on any loans is critical, along with keeping a healthy balance between good debt and bad debt.
Each time you apply for credit, your lending institution will examine 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 adversely by loan providers, as it showcases poor financial decisions and behaviours. To ensure that you maintain healthy financial habits, it’s essential that you recognise 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 typically an investment that will increase in value over time and will support you in creating wealth or providing long-term income. However, bad debt normally decreases in value rapidly and does not add any value to your wealth or yield a long-term return. To give you some knowledge, the following provides some examples of each of these types of debts.
The price of land has traditionally increased over time, so obtaining a home loan is considered a good debt because the value of your property will increase over time. In addition, home loans normally 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.
Getting a loan to invest in the stock exchange is also deemed to be good debt since the returns on the stock exchange are historically favourable. Loan providers often view stock market loans as good debt because you are trying to improve your wealth with time through a firm investment. Be careful though, it’s not wise to invest in the stock exchange 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 capacity 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 often the worst type of debt a person 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. People with credit card debts commonly have issues in obtaining future credit from lenders.
Vehicles and consumer goods
Another type of bad debt is loans for cars and other consumer goods. When you obtain 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 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 find yourself in a situation where you have to secure a loan to repay existing debt, it’s best to seek financial support as quickly as possible. This kind of borrowing will only result in further money problems, and the sooner you act, the more alternatives will be available to you to resolve the issue. If you find yourself dealing with a mountain of debt, call the specialists at Bankruptcy Experts Tablelands on 1300 795 575, or alternatively visit our website for further information: www.bankruptcyexpertstablelands.com.au