For a lot of Australian adults, debt is a part of our everyday lives. Regardless of whether you would like to further your skills by earning a degree, invest in a property for your family, or buy a car so your family has transportation, taking out a loan is very common simply because we don’t have sufficient money to pay for these costs upfront. It seems that most people gets a loan at one point or another, so what’s the issue?
The issue is that too many people don’t appreciate the difference between good debt and bad debt, and consequently, they take on too much bad debt which can cause major financial problems in the future. Not all loans are created equal, and usually you’ll discover an enormous difference between your credit card interest rates and your home loan interest rates. Eventually, your credit report will have a critical impact on your borrowing capacity, so paying your bills on time and not defaulting on any loans is very important, in addition to keeping a healthy balance between good debt and bad debt.
Each time you request a line of credit, your loan provider will review your credit report to assess your financial history and then determine whether they’ll authorise your loan. Too much bad debt on your credit report will be viewed adversely by lending institutions, as it showcases poor financial decisions and behaviours. To make certain that you maintain healthy financial habits, it’s crucial 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 fairly straightforward. Good debt is commonly an investment that will increase in value in time and will assist you in developing wealth or providing long-term income. Conversely, bad debt normally decreases in value rapidly and does not add any value to your wealth or create a long-term return. To give you some understanding, the following gives some examples of each of these types of debts.
The price of property has historically increased in time, so securing a mortgage is considered a good debt because the value of your property will increase over time. At the same time, home loans normally 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 deemed to be good debt since the returns on the stock market are traditionally favourable. Creditors commonly view stock market loans as good debt because you are trying to improve your wealth with time through a solid investment. Be careful though, it’s not wise to invest in the stock exchange unless you have an acceptable amount of knowledge.
Another type 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 in the future. 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 a person can have. Credit card debts demonstrates 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. Individuals with credit card debts typically have troubles in securing future credit from creditors.
Vehicles and consumer goods
Another type of bad debt is loans for cars 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 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 quickly.
Borrowing to repay debt
If you find yourself 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 create further money problems, and the sooner you act, the more choices will be available to you to resolve the issue. If you end up facing a mountain of debt, contact the specialists at Bankruptcy Experts Gosford on 1300 795 575, or alternatively visit our website for more information: www.bankruptcyexpertsgosford.com.au