For the majority of Australian adults, debt is a part of our daily lives. Whether or not you intend to advance your skills by obtaining a degree, purchase a house for your family, or buy a car so your family has transportation, obtaining a loan is very common simply because we don’t have enough money to pay for these expenditures upfront. It seems that everyone obtains a loan at one point or another, so what’s the issue?
The concern is that too many individuals don’t grasp the difference between good debt and bad debt, and consequently, they take on too much bad debt which can generate considerable financial problems down the road. Not all loans are created equal, and commonly you’ll find a huge difference between your credit card interest rates and your mortgage interest rates. With time, your credit report will have a serious effect on your borrowing capabilities, so paying your bills on time and not defaulting on any loans is vital, along with 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 assess your financial history and then decide whether they’ll authorise your loan. Too much bad debt on your credit report will be viewed negatively by loan providers, as it exposes poor financial decisions and behaviours. To make sure that you maintain healthy financial habits, it’s crucial that you comprehend 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 commonly an investment that will increase in value with time and will support you in developing wealth or providing long-term income. On the contrary, bad debt normally decreases in value quickly and does not add any value to your wealth or create a long-term return. To give you some understanding, the following offers some examples of each of these types of debts.
The price of land has historically increased in time, so obtaining a home loan is considered a good debt because the value of your property will increase over time. Additionally, mortgages typically have low interest rates and a long term, normally 20 to 30 years, which suggests that the value of your land 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 simply because the returns on the stock exchange are traditionally favourable. Lenders generally view stock market loans as good debt because you are striving to improve your wealth with time through a sound investment. Be careful though, it’s not wise to invest in the stock market 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, given that it enhances your skills and your capacity 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 traditionally the worst type of debt an individual can have. Credit card debts shows 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. People with credit card debts generally have challenges in securing future credit from financial institutions.
Cars and consumer goods
Another kind of bad debt is loans for vehicles and other consumer goods. When you obtain a loan to purchase a vehicle, 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 ultimately paying interest for something that depreciates in value very rapidly.
Borrowing to repay debt
If you end up in a situation where you have to obtain a loan to repay existing debt, it’s best to seek financial assistance as soon as possible. This kind of borrowing will only lead to further money problems, and the sooner you act, the more choices will be available to you to resolve the issue. If you find yourself facing a mountain of debt, phone the specialists at Bankruptcy Experts Northern Rivers on 1300 795 575, or alternatively visit our website for additional information: Bankruptcy Northernrivers