For a lot of Australian adults, debt is a part of our day-to-day lives. Whether you would like to advance your skills by obtaining a degree, invest in a property for your family, or purchase a car so your family has transport, taking out a loan is very common simply because we don’t have enough money to pay for these expenditures upfront. It seems that everybody takes out a loan at one point or another, so what’s the concern?
The concern is that too many folks don’t understand the difference between good debt and bad debt, and as a result, they take on too much bad debt which can result in considerable financial problems in the coming years. Not all loans are created equal, and typically you’ll find an extensive difference between your credit card interest rates and your home loan interest rates. Gradually, your credit report will have a significant impact on your borrowing abilities, so paying your bills on time and not defaulting on any loans is integral, coupled with keeping a healthy balance between good debt and bad debt.
Each time you apply for credit, your creditor will check your credit report to assess your financial history and then figure out whether they’ll authorise your loan. Too much bad debt on your credit report will be viewed negatively by lenders, as it reveals poor financial decisions and behaviours. To make sure that you maintain healthy financial practices, it’s crucial 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 commonly an investment that will increase in value in time and will help you in generating wealth or providing long-term income. Meanwhile, bad debt typically decreases in value rapidly and does not add any value to your wealth or earn 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 historically increased in time, so acquiring a mortgage is considered a good debt because the value of your land will increase over time. Likewise, home loans commonly have low interest rates and a long term, normally 20 to 30 years, which indicates 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 considered good debt simply because the returns on the stock exchange are traditionally favourable. Creditors generally view stock exchange loans as good debt because you are striving to boost your wealth in time through a sound investment. Be careful though, it’s not a good idea 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, considering that it enhances your skills and your capacity 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 enticing option.
Credit cards are normally the worst type of debt an individual can have. Credit card debts illustrates 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 generally have problems in receiving future credit from financial institutions.
Cars and consumer goods
Another kind of bad debt is loans for vehicles and other consumer goods. When you secure a loan to buy 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 basically paying interest for something that depreciates in value very fast.
Borrowing to repay debt
If you end up in a position where you have to take out a loan to repay existing debt, it’s best to seek financial advice immediately. This type of borrowing will only trigger further money problems, and the sooner you act, the more choices will be available to you to resolve the issue. If you find yourself dealing with a mountain of debt, phone the professionals at Bankruptcy Experts Adelaide on 1300 795 575, or alternatively visit our website for additional information: www.bankruptcyexpertsadelaide.com.au