For almost all Australian adults, debt is a part of our everyday lives. Regardless if you want to further your skills by obtaining a degree, buy a house for your family, or purchase a vehicle so your family has transport, securing 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 as a result, they take on too much bad debt which can lead to substantial financial problems down the road. 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. In time, your credit report will have a critical influence on your borrowing capacity, so paying your bills on time and not defaulting on any loans is critical, as well as keeping a healthy balance between good debt and bad debt.
Each time you make an application for credit, your creditor will inspect your credit report to evaluate your financial history and then determine whether they’ll authorise your loan. Too much bad debt on your credit report will be viewed negatively by lending institutions, as it exhibits poor financial decisions and behaviours. To make sure that you maintain healthy financial habits, it’s imperative that you recognise the difference between good debt and bad debt.
What’s the difference?
The difference between good debt and bad debt is pretty straightforward. Good debt is typically an investment that will increase in value over time and will assist you in creating wealth or providing long-term income. Conversely, bad debt typically decreases in value rapidly and does not add any value to your wealth or produce 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 traditionally increased with time, so securing a mortgage is considered a good debt because the value of your land will increase in time. Additionally, home loans normally have low interest rates and a long term, normally 20 to 30 years, which shows that the value of your land can double or triple during the life of your loan.
Securing a loan to invest in the stock market is also deemed to be good debt because the returns on the stock exchange are traditionally favourable. Lenders normally 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 market unless you have an ample amount of knowledge.
Another kind of good debt is investing in your education, whether it be university or a trade, given that it boosts your skills and your capability 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 attractive option.
Credit cards are traditionally the worst type of debt a person can have. Credit card debts demonstrates to financial institutions that you have poor financial habits because the interest rates are extremely high and you have nothing in value to show for your investment. Individuals with credit card debts often have problems in acquiring future credit from lenders.
Vehicles and consumer goods
Another type of bad debt is loans for cars and other consumer goods. When you take out 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 like flat screen TVs, because you are basically paying interest for something that depreciates in value very fast.
Borrowing to repay debt
If you end up in a position where you need to secure a loan to repay existing debt, it’s best to seek financial guidance as soon as possible. This kind of borrowing will only trigger further money problems, and the sooner you act, the more alternatives will be available to you to resolve the issue. If you find yourself facing a mountain of debt, consult with the professionals at Bankruptcy Experts Frankston on 1300 795 575, or alternatively visit our website for more information: www.bankruptcyexpertsfrankston.com.au