For most Australian adults, debt is a part of our everyday lives. Whether you wish to further your skills by obtaining a degree, invest in a home for your family, or buy a vehicle so your family has transportation, taking out a loan is very common simply because we don’t have enough money to pay for these expenses upfront. It appears that everyone secures a loan at one point or another, so what’s the concern?
The trouble is that too many individuals don’t recognise the difference between good debt and bad debt, and as a result, they take on too much bad debt which can cause significant financial problems in the future. Not all loans are created equal, and generally you’ll discover an enormous difference between your credit card interest rates and your mortgage interest rates. With time, your credit report will have a significant impact on your borrowing capacity, so paying your bills on time and not defaulting on any loans is vital, in addition to keeping a healthy balance between good debt and bad debt.
Each time you request a line of credit, your lender will check your credit report to assess your financial history and then determine whether they’ll endorse your loan. Too much bad debt on your credit report will be viewed negatively by lenders, as it exhibits poor financial decisions and behaviours. To ensure that you maintain healthy financial habits, it’s essential that you understand 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. Conversely, bad debt usually decreases in value quickly and does not add any value to your wealth or earn a long-term return. To give you some insight, the following offers some examples of each of these types of debts.
The price of property has traditionally increased in time, so securing a home loan is considered a good debt because the value of your property will increase over time. Additionally, mortgages often have low interest rates and a long term, normally 20 to 30 years, which suggests that the value of your home can double or triple during the life of your loan.
Getting a loan to invest in the stock exchange is also deemed to be good debt given that the returns on the stock market are historically favourable. Creditors typically view stock exchange loans as good debt because you are trying to enhance your wealth in time through a solid investment. Be careful though, it’s not a good idea to invest in the stock exchange unless you have a sufficient amount of knowledge.
Another kind of good debt is investing in your education, whether it be university or a trade, because it improves 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 traditionally the worst type of debt an individual can have. Credit card debts reveals 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 typically have complications in securing future credit from creditors.
Cars and consumer goods
Another kind of bad debt is loans for cars and other consumer goods. When you get 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 effectively 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 secure a loan to repay existing debt, it’s best to seek financial advice immediately. This kind of borrowing will only trigger further money problems, and the sooner you act, the more opportunities will be available to you to resolve the issue. If you end up facing a mountain of debt, contact the specialists at Gold Coast Bankruptcy Centre on 1300 795 575, or alternatively visit our website for more information: www.goldcoastbankruptcycentre.com.au