The Difference Between Good Debt and Bad Debt – What You Need To Understand
For the majority of Australian adults, debt is a part of our everyday lives. Whether or not you intend to further your skills by earning a degree, buy a property for your family, or buy a car so your family has transport, getting a loan is very common simply because we don’t have enough money to pay for these expenses upfront. It appears that everyone secures a loan at one point or another, so what’s the problem?
The issue is that lots of individuals don’t understand the difference between good debt and bad debt, and consequently, they take on too much bad debt which can generate substantial financial problems down the road. Not all loans are created equal, and typically you’ll discover a massive difference between your credit card interest rates and your home loan interest rates. With time, your credit report will have a significant impact on your borrowing capabilities, so paying your bills on time and not defaulting on any loans is paramount, in addition to keeping a healthy balance between good debt and bad debt.
Each time you request a line of credit, your financial institution will examine your credit report to analyse your financial history and then make a decision whether they’ll endorse your loan. Too much bad debt on your credit report will be viewed negatively by lending institutions, as it reveals poor financial decisions and behaviours. To ensure that you maintain healthy financial practices, it’s important 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 generally an investment that will increase in value in time and will assist you in generating wealth or providing long-term income. Meanwhile, bad debt generally decreases in value quickly and does not add any value to your wealth or yield a long-term return. To give you some knowledge, the following offers some examples of each of these types of debts.
The price of property has historically increased in time, so securing a mortgage is considered a good debt because the value of your land will increase over time. Also, home loans commonly have low interest rates and a long term, normally 20 to 30 years, which shows that the value of your home can double or triple during the life of your loan.
Securing a loan to invest in the stock exchange is also considered good debt simply because the returns on the stock exchange are historically favourable. Lenders usually view stock exchange loans as good debt because you are aiming to boost your wealth in time through a solid investment. Be careful though, it’s not a good idea to invest in the stock exchange 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 boosts 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 appealing option.
Credit cards are ordinarily the worst type of debt a person can have. Credit card debts demonstrates 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. People with credit card debts often have troubles in securing future credit from loan providers.
Vehicles and consumer goods
Another kind of bad debt is loans for cars and other consumer goods. When you take out 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 like flat screen TVs, because you are basically paying interest for something that depreciates in value very rapidly.
Borrowing to repay debt
If you end up in a position where you need to secure a loan to repay existing debt, it’s best to seek financial support as soon as possible. This kind of borrowing will only produce further money problems, and the sooner you act, the more opportunities will be available to you to resolve the issue. If you end up dealing with a mountain of debt, speak to the professionals at Bankruptcy Experts Joondalup on 1300 795 575, or alternatively visit our website for further information: www.bankruptcyexpertsjoondalup.com.au