The Difference Between Good Debt and Bad Debt – What You Need To Know
For the majority of Australian adults, debt is a part of our day-to-day lives. Whether you wish to advance your skills by earning a degree, buy a house 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 costs upfront. It appears that most people secures a loan at one point or another, so what’s the concern?
The issue is that lots of folks don’t recognise the difference between good debt and bad debt, and consequently, they take on too much bad debt which can lead to serious 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 home loan interest rates. Eventually, your credit report will have a substantial impact on your borrowing capacity, so paying your bills on time and not defaulting on any loans is critical, 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 shows poor financial decisions and behaviours. To ensure that you maintain healthy financial practices, it’s critical that you recognise 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 commonly an investment that will increase in value with time and will assist you in developing wealth or providing long-term income. Conversely, bad debt typically decreases in value rapidly and does not add any value to your wealth or create a long-term return. To give you some idea, the following provides 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 land will increase in time. Additionally, home loans typically have low interest rates and a long term, normally 20 to 30 years, which suggests that the value of your land can double or triple during the life of your loan.
Getting a loan to invest in the stock exchange is also considered good debt considering that the returns on the stock exchange are historically favourable. Lending institutions often view stock exchange loans as good debt because you are trying to increase your wealth over time through a sound investment. Be careful though, it’s not wise to invest in the stock exchange unless you have an acceptable amount of knowledge.
Another kind of good debt is investing in your education, whether it be university or a trade, because it boosts your skills and your ability 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 traditionally the worst type of debt an individual can have. Credit card debts displays 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 challenges in acquiring future credit from creditors.
Vehicles and consumer goods
Another kind of bad debt is loans for cars and other consumer goods. When you get a loan to buy a vehicle, it instantly 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 basically 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 take out a loan to repay existing debt, it’s best to seek financial assistance as soon as possible. This type 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 find yourself facing a mountain of debt, speak to the specialists at Bankruptcy Experts Melbourne on 1300 795 575, or alternatively visit our website for more information: www.bankruptcyexpertsmelbourne.com.au