|June 22, 2018||Comments Closed|
For the majority of Australian adults, debt is a part of our everyday lives. Regardless if you want to further your skills by obtaining a degree, buy a property for your family, or purchase a car so your family has transportation, securing a loan is very common simply because we don’t have enough money to pay for these costs upfront. It appears that most people secures a loan at one point or another, so what’s the concern?
The concern is that too many folks don’t understand the difference between good debt and bad debt, and consequently, they take on too much bad debt which can cause substantial financial problems in the future. Not all loans are created equal, and typically you’ll discover an extensive difference between your credit card interest rates and your mortgage interest rates. Eventually, your credit report will have a notable influence on your borrowing capabilities, so paying your bills on time and not defaulting on any loans is crucial, in conjunction with keeping a healthy balance between good debt and bad debt.
Each time you request a line of credit, your creditor 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 negatively by lenders, as it shows poor financial decisions and behaviours. To ensure that you maintain healthy financial habits, it’s crucial 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 commonly an investment that will increase in value with time and will assist you in creating wealth or providing long-term income. On the other hand, bad debt generally decreases in value quickly and does not add any value to your wealth or create a long-term return. To give you some idea, the following gives some examples of each of these types of debts.
The price of land has historically increased over time, so securing a home loan is considered a good debt because the value of your property will increase with time. In addition, home loans commonly have low interest rates and a long term, normally 20 to 30 years, which illustrates that the value of your home can double or triple during the life of your loan.
Taking out a loan to invest in the stock exchange is also deemed to be good debt because the returns on the stock exchange are historically favourable. Lenders usually view stock market loans as good debt because you are striving to boost your wealth with time through a solid investment. Be careful though, it’s not a good idea to invest in the stock market 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, simply because it boosts 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 attractive option.
Credit cards are typically 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 extremely high and you have nothing in value to show for your investment. Folks with credit card debts typically have troubles in acquiring future credit from loan providers.
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 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 effectively paying interest for something that depreciates in value very rapidly.
Borrowing to repay debt
If you end up in a position where you have to take out a loan to repay existing debt, it’s best to seek financial advice as quickly as possible. This type of borrowing will only trigger further money problems, and the sooner you act, the more solutions will be available to you to resolve the issue. If you find yourself dealing with a mountain of debt, consult with the professionals at Bankruptcy Experts Bendigo on 1300 795 575, or alternatively visit our website for further information: www.bankruptcyexpertsbendigo.com.au