For most Australian adults, debt is a part of our daily lives. Regardless if you want to enhance your skills by earning a degree, buy a house for your family, or purchase a car so your family has transportation, securing a loan is very common simply because we don’t have sufficient money to pay for these expenses upfront. It seems that most people takes out a loan at one point or another, so what’s the concern?
The concern is that lots of individuals don’t grasp the difference between good debt and bad debt, and as a result, they take on too much bad debt which can lead to serious financial problems in the coming years. Not all loans are created equal, and normally you’ll find a huge difference between your credit card interest rates and your home loan interest rates. In time, your credit report will have a notable impact on your borrowing abilities, so paying your bills on time and not defaulting on any loans is crucial, as well as keeping a healthy balance between good debt and bad debt.
Each time you request a line of 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 negatively by lenders, as it displays poor financial decisions and behaviours. To make sure that you maintain healthy financial habits, it’s essential that you comprehend 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 in time and will assist you in developing wealth or providing long-term income. However, bad debt typically decreases in value quickly and does not add any value to your wealth or yield a long-term return. To give you some understanding, the following provides some examples of each of these types of debts.
The price of land has traditionally increased in time, so obtaining a home loan is considered a good debt because the value of your land will increase over time. Likewise, home loans generally 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 market is also considered good debt because the returns on the stock market are historically favourable. Loan providers typically view stock exchange loans as good debt because you are striving to enhance your wealth with time through a solid 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 type of good debt is investing in your education, whether it be university or a trade, since it increases 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 generally the worst type of debt an individual can have. Credit card debts shows 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. People with credit card debts generally have troubles in acquiring 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 car, it immediately 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 essentially paying interest for something that depreciates in value very fast.
Borrowing to repay debt
If you find yourself in a situation where you have to get a loan to repay existing debt, it’s best to seek financial guidance as soon as possible. This kind of borrowing will only generate further money problems, and the sooner you act, the more options will be available to you to resolve the issue. If you end up facing a mountain of debt, talk to the professionals at Bankruptcy Experts Shellharbour on 1300 795 575, or alternatively visit our website for additional information: www.bankruptcyexpertsshellharbour.com.au