For most Australian adults, debt is a part of our everyday lives. Whether or not you intend to enhance your skills by earning a degree, purchase a house for your family, or purchase 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 seems that everybody obtains a loan at one point or another, so what’s the issue?
The concern is that too many people don’t understand the difference between good debt and bad debt, and consequently, they take on too much bad debt which can bring on substantial financial problems down the road. Not all loans are created equal, and normally you’ll discover an enormous difference between your credit card interest rates and your home loan interest rates. As time go on, your credit report will have a significant effect on your borrowing abilities, so paying your bills on time and not defaulting on any loans is crucial, in addition to keeping a healthy balance between good debt and bad debt.
Each time you make an application for credit, your lender will check your credit report to determine your financial history and then decide 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 sure that you maintain healthy financial habits, it’s vital that you have knowledge of 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 commonly an investment that will increase in value over time and will assist you in constructing wealth or providing long-term income. Meanwhile, bad debt typically decreases in value rapidly and does not add any value to your wealth or generate a long-term return. To give you some knowledge, the following offers some examples of each of these types of debts.
The price of land has traditionally increased in time, so securing a home loan is considered a good debt because the value of your land will increase over time. At the same time, home loans often have low interest rates and a long term, normally 20 to 30 years, which suggests that the value of your home can double or triple during the life of your loan.
Getting a loan to invest in the stock market is also deemed to be good debt simply because the returns on the stock exchange are historically favourable. Creditors commonly view stock market loans as good debt because you are aiming to increase 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 adequate amount of knowledge.
Another type of good debt is investing in your education, whether it be university or a trade, simply because it improves your skills and your ability 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 normally the worst type of debt a person can have. Credit card debts illustrates 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. Folks with credit card debts often have troubles in receiving future credit from lenders.
Vehicles and consumer goods
Another kind of bad debt is loans for cars and other consumer goods. When you get a loan to purchase a vehicle, it instantly 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 essentially paying interest for something that depreciates in value very fast.
Borrowing to repay debt
If you end up in a position where you need to take out 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 alternatives will be available to you to resolve the issue. If you find yourself facing a mountain of debt, contact the professionals at Bankruptcy Experts Port Stephens on 1300 795 575, or alternatively visit our website for more information: www.bankruptcyexpertsportstephens.com.au