June 25, 2018 Comments Closed

The Difference Between Good Debt and Bad Debt – What You Need To Understand

Posted by:admin onJune 25, 2018

For most Australian adults, debt is a part of our daily lives. Whether or not you would like to further your skills by obtaining a degree, buy a property for your family, or buy a car so your family has transport, obtaining a loan is very common simply because we don’t have sufficient money to pay for these costs upfront. It appears that everybody secures a loan at one point or another, so what’s the problem?

The trouble is that too many individuals don’t appreciate the difference between good debt and bad debt, and as a result, they take on too much bad debt which can bring on major financial problems down the road. Not all loans are created equal, and generally you’ll discover an incredible difference between your credit card interest rates and your mortgage interest rates. Gradually, your credit report will have a meaningful impact on your borrowing capacity, so paying your bills on time and not defaulting on any loans is crucial, alongside keeping a healthy balance between good debt and bad debt.

Each time you request a line of credit, your creditor will examine your credit report to analyse your financial history and then figure out whether they’ll endorse your loan. Too much bad debt on your credit report will be viewed detrimentally by creditors, as it exposes poor financial decisions and behaviours. To make certain that you maintain healthy financial habits, it’s vital that you have knowledge 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 help you in building wealth or providing long-term income. Conversely, bad debt primarily 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 provides some examples of each of these types of debts.

Property

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. At the same time, home loans often have low interest rates and a long term, normally 20 to 30 years, which reveals that the value of your property can double or triple during the life of your loan.

Stock Market

Securing a loan to invest in the stock exchange is also considered good debt since the returns on the stock exchange are traditionally favourable. Lenders often view stock exchange loans as good debt because you are trying to enhance 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.

Education

Another kind of good debt is investing in your education, whether it be university or a trade, simply because it increases your skills and your potential 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

Credit cards are ordinarily the worst type of debt an individual can have. Credit card debts reveals to lending institutions that you have poor financial habits because the interest rates are exceptionally high and you have nothing in value to show for your investment. Individuals with credit card debts usually have troubles in acquiring future credit from creditors.

Cars and consumer goods

Another kind of bad debt is loans for cars and other consumer goods. When you obtain a loan to purchase a car, it immediately 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 rapidly.

Borrowing to repay debt

If you end up in a situation 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 options will be available to you to resolve the issue. If you find yourself facing a mountain of debt, consult with the specialists at Bankruptcy Experts Mount Isa on 1300 795 575, or alternatively visit our website for more information: www.bankruptcyexpertsmountisa.com.au

 

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