The Difference Between Good Debt and Bad Debt – What You Need To Understand
For most Australian adults, debt is a part of our everyday lives. Whether or not you intend to further your skills by obtaining a degree, buy a house for your family, or buy 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 everyone takes out a loan at one point or another, so what’s the issue?
The problem is that lots of folks don’t realise the difference between good debt and bad debt, and consequently, they take on too much bad debt which can cause substantial financial problems in the future. Not all loans are created equal, and generally you’ll find a colossal difference between your credit card interest rates and your home loan interest rates. Gradually, your credit report will have a serious impact on your borrowing capabilities, 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 lending institution will check 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 adversely by financial institutions, as it reveals poor financial decisions and behaviours. To make certain that you maintain healthy financial habits, it’s critical that you are aware 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 in time and will help you in developing wealth or providing long-term income. On the contrary, bad debt typically decreases in value rapidly and does not add any value to your wealth or yield a long-term return. To give you some knowledge, the following gives some examples of each of these types of debts.
The price of property has historically increased with time, so obtaining a home loan is considered a good debt because the value of your land will increase in time. At the same time, mortgages generally have low interest rates and a long term, normally 20 to 30 years, which reveals 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 considered good debt since the returns on the stock market are historically favourable. Creditors normally view stock market 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 adequate amount of knowledge.
Another kind of good debt is investing in your education, whether it be university or a trade, because it enhances 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 normally the worst type of debt an individual can have. Credit card debts displays to lenders that you have poor financial habits because the interest rates are extremely high and you have nothing in value to show for your investment. Individuals with credit card debts frequently have troubles in receiving future credit from loan providers.
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 car, it immediately 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 ultimately paying interest for something that depreciates in value very fast.
Borrowing to repay debt
If you end up in a situation where you need to take out a loan to repay existing debt, it’s best to seek financial support as soon as possible. This type of borrowing will only produce further money problems, and the sooner you act, the more options will be available to you to resolve the issue. If you find yourself facing a mountain of debt, talk to the professionals at Bankruptcy Experts Wollongong on 1300 795 575, or alternatively visit our website for additional information: www.bankruptcyexpertswollongong.com.au