For the majority of Australian adults, debt is a part of our everyday lives. Whether you want to enhance your skills by earning a degree, purchase 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 costs upfront. It seems that most people secures a loan at one point or another, so what’s the problem?
The trouble is that lots of folks don’t understand the difference between good debt and bad debt, and consequently, they take on too much bad debt which can cause considerable financial problems in the coming years. Not all loans are created equal, and typically you’ll discover an enormous difference between your credit card interest rates and your mortgage interest rates. Gradually, your credit report will have a great impact on your borrowing abilities, so paying your bills on time and not defaulting on any loans is integral, along with keeping a healthy balance between good debt and bad debt.
Each time you request a line of credit, your loan provider will examine your credit report to analyse your financial history and then decide whether they’ll endorse your loan. Too much bad debt on your credit report will be viewed detrimentally by lenders, as it reveals poor financial decisions and behaviours. To ensure that you maintain healthy financial habits, it’s important that you comprehend 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 generally an investment that will increase in value with time and will support you in building wealth or providing long-term income. On the other hand, 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 understanding, the following gives some examples of each of these types of debts.
The price of land has traditionally increased in time, so acquiring a home loan is considered a good debt because the value of your property will increase in time. Likewise, mortgages largely have low interest rates and a long term, normally 20 to 30 years, which illustrates that the value of your land can double or triple during the life of your loan.
Securing a loan to invest in the stock exchange is also considered good debt given that the returns on the stock market are traditionally favourable. Financial institutions commonly view stock exchange loans as good debt because you are striving to enhance your wealth with time through a firm investment. Be careful though, it’s not a good idea to invest in the stock exchange unless you have an adequate amount of knowledge.
Another type of good debt is investing in your education, whether it be university or a trade, given that it boosts your skills and your potential 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 generally 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 remarkably high and you have nothing in value to show for your investment. Folks with credit card debts frequently have troubles in obtaining future credit from creditors.
Cars and consumer goods
Another type of bad debt is loans for cars and other consumer goods. When you get a loan to buy a car, it instantly 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 ultimately paying interest for something that depreciates in value very rapidly.
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 support as soon as possible. This kind of borrowing will only bring on further money problems, and the sooner you act, the more choices will be available to you to resolve the issue. If you find yourself dealing with a mountain of debt, call the professionals at Bankruptcy Experts Cairns on 1300 795 575, or alternatively visit our website for further information: www.bankruptcyexpertscairns.com.au