June 24, 2018 Comments Closed

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

Posted by:admin onJune 24, 2018

For almost all Australian adults, debt is a part of our everyday lives. Regardless if you want to further your skills by earning a degree, invest in a property for your family, or buy a vehicle so your family has transport, taking out a loan is very common simply because we don’t have sufficient money to pay for these expenditures upfront. It appears that most people takes out a loan at one point or another, so what’s the problem?

The concern is that too many people don’t recognise the difference between good debt and bad debt, and as a result, they take on too much bad debt which can cause considerable financial problems in the future. Not all loans are created equal, and commonly you’ll find a vast difference between your credit card interest rates and your home loan interest rates. Eventually, your credit report will have a critical impact on your borrowing capabilities, so paying your bills on time and not defaulting on any loans is paramount, coupled with keeping a healthy balance between good debt and bad debt.

Each time you apply for credit, your creditor will examine your credit report to evaluate 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 adversely by lenders, as it reveals poor financial decisions and behaviours. To make sure that you maintain healthy financial habits, it’s imperative 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 generally an investment that will increase in value with time and will support you in creating wealth or providing long-term income. However, bad debt commonly decreases in value quickly and does not add any value to your wealth or produce a long-term return. To give you some idea, the following provides some examples of each of these types of debts.

Property

The price of land has historically increased in time, so acquiring a home loan is considered a good debt because the value of your land will increase over time. On top of that, home loans usually 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.

Stock Market

Securing a loan to invest in the stock exchange is also considered good debt since the returns on the stock exchange are historically favourable. Lenders normally view stock exchange loans as good debt because you are attempting to enhance your wealth over time through a sound investment. Be careful though, it’s not wise to invest in the stock market unless you have an ample amount of knowledge.

Education

Another kind of good debt is investing in your education, whether it be university or a trade, considering that it improves your skills and your ability 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

Credit cards are often the worst type of debt an individual can have. Credit card debts reveals 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. Individuals with credit card debts typically have challenges in securing future credit from financial institutions.

Vehicles and consumer goods

Another kind of bad debt is loans for cars and other consumer goods. When you take out a loan to buy a car, 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 essentially paying interest for something that depreciates in value very fast.

Borrowing to repay debt

If you end up in a position where you need to get a loan to repay existing debt, it’s best to seek financial advice as quickly as possible. This kind of borrowing will only generate further money problems, and the sooner you act, the more opportunities will be available to you to resolve the issue. If you end up dealing with a mountain of debt, phone the professionals at Bankruptcy Experts Ipswich on 1300 795 575, or alternatively visit our website for further information: Bankruptcy Experts Ipswich

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