For most Australian adults, debt is a part of our everyday lives. Whether or not you wish to further your skills by obtaining a degree, purchase a property for your family, or purchase a vehicle so your family has transportation, obtaining a loan is very common simply because we don’t have enough money to pay for these expenditures upfront. It appears that most people gets a loan at one point or another, so what’s the concern?
The trouble is that lots of individuals don’t appreciate 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 commonly you’ll discover a tremendous difference between your credit card interest rates and your mortgage interest rates. Gradually, your credit report will have a vital influence on your borrowing capabilities, so paying your bills on time and not defaulting on any loans is integral, together with keeping a healthy balance between good debt and bad debt.
Each time you request a line of credit, your lending institution will inspect your credit report to determine your financial history and then decide whether they’ll authorise your loan. Too much bad debt on your credit report will be viewed adversely by loan providers, as it reveals poor financial decisions and behaviours. To ensure that you maintain healthy financial habits, 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 pretty straightforward. Good debt is frequently an investment that will increase in value in time and will assist you in creating wealth or providing long-term income. On the other hand, bad debt commonly decreases in value quickly and does not add any value to your wealth or earn a long-term return. To give you some understanding, the following gives some examples of each of these types of debts.
The price of property has traditionally increased in time, so acquiring a mortgage is considered a good debt because the value of your land will increase in time. On top of that, mortgages usually have low interest rates and a long term, normally 20 to 30 years, which suggests that the value of your property can double or triple during the life of your loan.
Obtaining a loan to invest in the stock market is also considered good debt because the returns on the stock exchange are traditionally favourable. Lenders normally view stock exchange loans as good debt because you are trying to improve your wealth in time through a sound investment. Be careful though, it’s not wise to invest in the stock exchange unless you have an adequate amount of knowledge.
Another kind of good debt is investing in your education, whether it be university or a trade, given that it improves your skills and your capacity 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 appealing option.
Credit cards are often the worst type of debt a person can have. Credit card debts displays to loan providers that you have poor financial habits because the interest rates are exceptionally high and you have nothing in value to show for your investment. People with credit card debts often have complications in receiving future credit from lending institutions.
Cars and consumer goods
Another kind of bad debt is loans for vehicles and other consumer goods. When you obtain 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 such as flat screen TVs, because you are essentially 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 assistance as quickly as possible. This type of borrowing will only lead to further money problems, and the sooner you act, the more opportunities will be available to you to resolve the issue. If you find yourself dealing with a mountain of debt, talk to the professionals at Bankruptcy Experts Tweed Coast on 1300 795 575, or alternatively visit our website for further information: Bankruptcy Tweedcoast