For many Australian adults, debt is a part of our day-to-day lives. Whether you would like to further your skills by earning 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 sufficient money to pay for these expenses upfront. It seems that everybody gets a loan at one point or another, so what’s the issue?
The concern is that too many folks don’t recognise the difference between good debt and bad debt, and as a result, they take on too much bad debt which can bring about serious financial problems down the road. Not all loans are created equal, and normally you’ll discover a colossal difference between your credit card interest rates and your home loan interest rates. Gradually, your credit report will have a substantial influence on your borrowing abilities, so paying your bills on time and not defaulting on any loans is essential, along with keeping a healthy balance between good debt and bad debt.
Each time you request a line of credit, your lender will review your credit report to evaluate your financial history and then figure out whether they’ll endorse your loan. Too much bad debt on your credit report will be viewed negatively by creditors, as it exhibits poor financial decisions and behaviours. To make sure that you maintain healthy financial habits, it’s imperative 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 developing wealth or providing long-term income. However, bad debt frequently decreases in value quickly and does not add any value to your wealth or yield a long-term return. To give you some understanding, the following provides some examples of each of these types of debts.
The price of property has traditionally increased in time, so securing a home loan is considered a good debt because the value of your property will increase with time. Furthermore, mortgages largely have low interest rates and a long term, normally 20 to 30 years, which reveals that the value of your home can double or triple during the life of your loan.
Obtaining a loan to invest in the stock market is also deemed to be good debt considering that the returns on the stock market are historically favourable. Creditors typically view stock market loans as good debt because you are aiming to improve your wealth in time through a firm investment. Be careful though, it’s not a good idea to invest in the stock exchange unless you have an ample amount of knowledge.
Another type of good debt is investing in your education, whether it be university or a trade, since 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 attractive option.
Credit cards are ordinarily the worst type of debt a person can have. Credit card debts displays to financial institutions 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 often have challenges in acquiring future credit from lending institutions.
Cars and consumer goods
Another type of bad debt is loans for vehicles and other consumer goods. When you secure a loan to purchase a vehicle, it immediately decreases in value when you drive it out of the car dealership. The same applies to consumer goods such as 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 situation where you need to obtain a loan to repay existing debt, it’s best to seek financial advice immediately. This kind of borrowing will only lead to further money problems, and the sooner you act, the more options will be available to you to resolve the issue. If you end up dealing with a mountain of debt, talk with the specialists at Bankruptcy Wagga Wagga on 1300 818 575, or alternatively visit our website for further information: http://www.bankruptcy-waggawagga.com.au/