The Difference Between Good Debt and Bad Debt – What You Need To Know
For many Australian adults, debt is a part of our day-to-day lives. Regardless if you would like to further your skills by obtaining a degree, invest in a property for your family, or buy a vehicle so your family has transport, securing a loan is very common simply because we don’t have enough money to pay for these expenses upfront. It seems that everybody obtains a loan at one point or another, so what’s the concern?
The concern is that too many folks don’t recognise 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 future. Not all loans are created equal, and commonly you’ll discover a colossal difference between your credit card interest rates and your home loan interest rates. Over time, your credit report will have a substantial influence on your borrowing abilities, so paying your bills on time and not defaulting on any loans is integral, in conjunction with keeping a healthy balance between good debt and bad debt.
Each time you apply for credit, your creditor will inspect 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 negatively by lending institutions, as it exposes poor financial decisions and behaviours. To make sure 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 frequently an investment that will increase in value over time and will support you in creating wealth or providing long-term income. On the contrary, bad debt typically decreases in value rapidly and does not add any value to your wealth or create a long-term return. To give you some insight, the following gives some examples of each of these types of debts.
The price of property has historically increased over time, so acquiring a mortgage is considered a good debt because the value of your land will increase in time. Likewise, mortgages typically 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.
Securing a loan to invest in the stock exchange is also deemed to be good debt because the returns on the stock exchange are traditionally favourable. Lending institutions commonly view stock market loans as good debt because you are aiming to enhance your wealth over time through a sound investment. Be careful though, it’s not a good idea to invest in the stock market unless you have an acceptable 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 ability 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 typically the worst type of debt an individual can have. Credit card debts reveals to financial institutions that you have poor financial habits because the interest rates are incredibly high and you have nothing in value to show for your investment. Folks with credit card debts generally have issues in receiving future credit from lenders.
Cars and consumer goods
Another kind of bad debt is loans for cars and other consumer goods. When you secure a loan to purchase a vehicle, 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 effectively paying interest for something that depreciates in value very fast.
Borrowing to repay debt
If you end up 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 produce further money problems, and the sooner you act, the more options will be available to you to resolve the issue. If you end up dealing with a mountain of debt, reach out to the professionals at Bankruptcy Experts Australia on 1300 795 575, or alternatively visit our website for further information: Bankruptcy Advice Australia