For a lot of Australian adults, debt is a part of our daily lives. Whether you want to advance your skills by earning a degree, purchase a property for your family, or buy a vehicle so your family has transport, obtaining a loan is very common simply because we don’t have enough money to pay for these costs upfront. It seems that everyone obtains 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 consequently, they take on too much bad debt which can generate serious financial problems in the future. Not all loans are created equal, and commonly you’ll find a tremendous difference between your credit card interest rates and your home loan interest rates. Over time, your credit report will have a significant effect on your borrowing capabilities, so paying your bills on time and not defaulting on any loans is important, together with keeping a healthy balance between good debt and bad debt.
Each time you apply for credit, your creditor will review your credit report to determine your financial history and then make a decision whether they’ll approve your loan. Too much bad debt on your credit report will be viewed adversely by financial institutions, as it reveals poor financial decisions and behaviours. To make certain that you maintain healthy financial habits, it’s vital that you appreciate 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 frequently an investment that will increase in value in time and will assist you in constructing wealth or providing long-term income. Meanwhile, 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 knowledge, the following provides some examples of each of these types of debts.
The price of land has traditionally increased in time, so obtaining a home loan is considered a good debt because the value of your land will increase over time. Furthermore, home loans typically have low interest rates and a long term, normally 20 to 30 years, which illustrates 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 regarded as good debt because the returns on the stock exchange are traditionally favourable. Creditors commonly view stock exchange loans as good debt because you are trying to improve your wealth over time through a stable investment. Be careful though, it’s not wise to invest in the stock market 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, considering that it boosts your skills and your potential 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 appealing option.
Credit cards are primarily the worst type of debt an individual can have. Credit card debts demonstrates to lenders that you have poor financial habits because the interest rates are incredibly high and you have nothing in value to show for your investment. Individuals with credit card debts frequently have challenges in securing future credit from lending institutions.
Cars and consumer goods
Another kind of bad debt is loans for vehicles and other consumer goods. When you take out a loan to buy a car, 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 effectively paying interest for something that depreciates in value very quickly.
Borrowing to repay debt
If you find yourself in a position where you need to get a loan to repay existing debt, it’s best to seek financial guidance as quickly as possible. This type of borrowing will only create further money problems, and the sooner you act, the more alternatives will be available to you to resolve the issue. If you end up dealing with a mountain of debt, speak with the professionals at Bankruptcy Experts Dandenong on 1300 795 575, or alternatively visit our website for further information: www.bankruptcyexpertsdandenong.com.au