For most Australian adults, debt is a part of our daily lives. Regardless if you wish to advance your skills by obtaining a degree, invest in a house for your family, or purchase 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 costs upfront. It seems that everybody gets a loan at one point or another, so what’s the concern?
The issue is that a lot of folks don’t realise the difference between good debt and bad debt, and consequently, they take on too much bad debt which can bring about considerable financial problems in the future. Not all loans are created equal, and generally you’ll discover a huge difference between your credit card interest rates and your home loan interest rates. Eventually, your credit report will have a notable impact on your borrowing capabilities, so paying your bills on time and not defaulting on any loans is paramount, coupled with keeping a healthy balance between good debt and bad debt.
Each time you make an application for credit, your creditor will check your credit report to assess 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 detrimentally by creditors, as it shows poor financial decisions and behaviours. To make certain that you maintain healthy financial habits, it’s vital that you appreciate the difference between good debt and bad debt.
What’s the difference?
The difference between good debt and bad debt is fairly straightforward. Good debt is frequently an investment that will increase in value in time and will support you in creating wealth or providing long-term income. Conversely, bad debt usually decreases in value quickly and does not add any value to your wealth or generate a long-term return. To give you some insight, the following offers some examples of each of these types of debts.
The price of land has traditionally increased with time, so acquiring a mortgage is considered a good debt because the value of your property will increase over time. In addition, home loans often 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.
Getting a loan to invest in the stock market is also deemed to be good debt because the returns on the stock market are historically favourable. Creditors commonly view stock market loans as good debt because you are trying to boost your wealth with time through a solid investment. Be careful though, it’s not wise to invest in the stock market unless you have a sufficient amount of knowledge.
Another type of good debt is investing in your education, whether it be university or a trade, considering that it boosts 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 ordinarily the worst type of debt a person can have. Credit card debts displays to lenders that you have poor financial habits because the interest rates are exceedingly high and you have nothing in value to show for your investment. Folks with credit card debts often have complications in acquiring future credit from financial institutions.
Vehicles and consumer goods
Another type of bad debt is loans for cars and other consumer goods. When you take out 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 ultimately paying interest for something that depreciates in value very rapidly.
Borrowing to repay debt
If you find yourself in a situation where you have to take out a loan to repay existing debt, it’s best to seek financial advice as soon 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 end up facing a mountain of debt, call the specialists at Bankruptcy Experts Tennant Creek on 1300 795 575, or alternatively visit our website for more information: Insolvency Tennant Creek