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 daily lives. Whether or not you want to enhance your skills by earning a degree, invest in a house for your family, or buy a vehicle so your family has transport, obtaining a loan is very common simply because we don’t have sufficient money to pay for these expenses upfront. It seems that everyone obtains a loan at one point or another, so what’s the problem?
The issue is that a lot of folks don’t appreciate the difference between good debt and bad debt, and consequently, they take on too much bad debt which can produce significant financial problems down the road. Not all loans are created equal, and typically you’ll find a tremendous difference between your credit card interest rates and your home loan interest rates. In time, your credit report will have a considerable effect on your borrowing capacity, so paying your bills on time and not defaulting on any loans is very important, together with keeping a healthy balance between good debt and bad debt.
Each time you request a line of credit, your loan provider will examine your credit report to analyse your financial history and then decide whether they’ll endorse your loan. Too much bad debt on your credit report will be viewed detrimentally by financial institutions, as it exhibits poor financial decisions and behaviours. To make certain that you maintain healthy financial practices, it’s vital that you understand 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 frequently an investment that will increase in value with time and will support you in constructing wealth or providing long-term income. On the contrary, bad debt normally decreases in value rapidly and does not add any value to your wealth or generate a long-term return. To give you some idea, the following provides some examples of each of these types of debts.
The price of land has traditionally increased over time, so acquiring a mortgage is considered a good debt because the value of your property will increase with time. Also, mortgages typically have low interest rates and a long term, normally 20 to 30 years, which shows that the value of your land can double or triple during the life of your loan.
Taking out a loan to invest in the stock exchange is also regarded as good debt simply because the returns on the stock exchange are traditionally favourable. Financial institutions generally view stock exchange loans as good debt because you are striving to improve your wealth in time through a stable investment. Be careful though, it’s not wise to invest in the stock market 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, since it improves your skills and your potential 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 an individual can have. Credit card debts shows to loan providers 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 challenges in obtaining future credit from financial institutions.
Vehicles and consumer goods
Another kind of bad debt is loans for vehicles and other consumer goods. When you secure 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 like flat screen TVs, because you are ultimately paying interest for something that depreciates in value very fast.
Borrowing to repay debt
If you find yourself in a position where you have to take out a loan to repay existing debt, it’s best to seek financial advice as soon as possible. This kind of borrowing will only generate further money problems, and the sooner you act, the more solutions will be available to you to resolve the issue. If you find yourself dealing with a mountain of debt, speak to the specialists at Bankruptcy Experts Geelong on 1300 795 575, or alternatively visit our website for further information: www.bankruptcyexpertsgeelong.com.au