The Difference Between Good Debt and Bad Debt – What You Need To Know
For most Australian adults, debt is a part of our everyday lives. Whether or not you intend to advance your skills by obtaining a degree, invest in 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 enough money to pay for these expenditures upfront. It seems that most people secures a loan at one point or another, so what’s the issue?
The issue is that a lot of people don’t realise the difference between good debt and bad debt, and consequently, they take on too much bad debt which can lead to major 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. As time go on, your credit report will have a considerable impact on your borrowing abilities, so paying your bills on time and not defaulting on any loans is critical, alongside 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 make a decision whether they’ll authorise your loan. Too much bad debt on your credit report will be viewed detrimentally by lending institutions, as it reveals poor financial decisions and behaviours. To make certain that you maintain healthy financial practices, it’s important that you are aware of 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 frequently an investment that will increase in value in time and will assist you in constructing wealth or providing long-term income. On the other hand, bad debt usually decreases in value quickly and does not add any value to your wealth or create a long-term return. To give you some insight, the following provides some examples of each of these types of debts.
The price of land has historically increased in time, so acquiring a mortgage is considered a good debt because the value of your land will increase with time. At the same time, mortgages commonly have low interest rates and a long term, normally 20 to 30 years, which illustrates that the value of your property can double or triple during the life of your loan.
Securing a loan to invest in the stock exchange is also regarded as good debt considering that the returns on the stock market are traditionally favourable. Financial institutions typically view stock exchange loans as good debt because you are trying to enhance your wealth over time through a stable investment. Be careful though, it’s not a good idea to invest in the stock market unless you have an acceptable amount of knowledge.
Another type of good debt is investing in your education, whether it be university or a trade, considering that it enhances 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 enticing option.
Credit cards are ordinarily the worst type of debt an individual can have. Credit card debts demonstrates to lending institutions that you have poor financial habits because the interest rates are exceedingly high and you have nothing in value to show for your investment. People with credit card debts generally have challenges in obtaining future credit from lenders.
Vehicles and consumer goods
Another type of bad debt is loans for vehicles and other consumer goods. When you obtain a loan to purchase a car, 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 fast.
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 assistance as quickly as possible. This type of borrowing will only bring on further money problems, and the sooner you act, the more solutions will be available to you to resolve the issue. If you find yourself facing a mountain of debt, speak to the professionals at Bankruptcy Experts Bunbury on 1300 795 575, or alternatively visit our website for further information: Bankruptcy Bunbury