The Difference Between Good Debt and Bad Debt – What You Need To Understand
For the majority of Australian adults, debt is a part of our daily lives. Whether or not you want to advance your skills by earning a degree, purchase a house for your family, or buy a car so your family has transportation, getting a loan is very common simply because we don’t have enough money to pay for these expenditures upfront. It seems that everybody secures a loan at one point or another, so what’s the issue?
The issue is that too many folks don’t realise 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 future. Not all loans are created equal, and normally you’ll find an extensive difference between your credit card interest rates and your mortgage interest rates. Gradually, your credit report will have a substantial effect on your borrowing capabilities, so paying your bills on time and not defaulting on any loans is very important, in conjunction with keeping a healthy balance between good debt and bad debt.
Each time you make an application for credit, your creditor will review 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 adversely by lenders, as it exhibits poor financial decisions and behaviours. To make certain that you maintain healthy financial practices, it’s important 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 normally an investment that will increase in value in time and will assist you in creating wealth or providing long-term income. Meanwhile, bad debt primarily decreases in value quickly and does not add any value to your wealth or earn 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 traditionally increased over time, so acquiring a home loan is considered a good debt because the value of your land will increase in time. On top of that, home loans normally have low interest rates and a long term, normally 20 to 30 years, which reveals that the value of your property can double or triple during the life of your loan.
Taking out a loan to invest in the stock market is also deemed to be good debt simply because the returns on the stock exchange are historically favourable. Loan providers often view stock exchange loans as good debt because you are aiming to increase your wealth in time through a solid investment. Be careful though, it’s not wise to invest in the stock exchange 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 improves your skills and your capability 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 attractive option.
Credit cards are normally the worst type of debt a person can have. Credit card debts demonstrates 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. Folks with credit card debts commonly have problems in acquiring future credit from financial institutions.
Cars and consumer goods
Another type of bad debt is loans for vehicles 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 like flat screen TVs, because you are essentially 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 secure a loan to repay existing debt, it’s best to seek financial support as soon as possible. This type of borrowing will only lead to further money problems, and the sooner you act, the more solutions will be available to you to resolve the issue. If you end up facing a mountain of debt, talk with the specialists at Bankruptcy Experts Sydney on 1300 795 575, or alternatively visit our website for more information: Bankrupt Sydney