June 21, 2018 0

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

Posted by:Charles Bosse onJune 21, 2018

For most Australian adults, debt is a part of our everyday lives. Regardless of whether you want to advance your skills by earning a degree, invest in a home 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 costs upfront. It seems that most people takes out a loan at one point or another, so what’s the problem?

The problem is that a lot of people don’t grasp the difference between good debt and bad debt, and as a result, they take on too much bad debt which can generate significant financial problems in the coming years. Not all loans are created equal, and commonly you’ll discover a massive difference between your credit card interest rates and your home loan interest rates. In time, your credit report will have a major impact on your borrowing capabilities, so paying your bills on time and not defaulting on any loans is crucial, coupled with keeping a healthy balance between good debt and bad debt.

Each time you apply for credit, your loan provider will examine your credit report to determine 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 lending institutions, as it exposes poor financial decisions and behaviours. To make certain 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 fairly straightforward. Good debt is usually an investment that will increase in value over time and will support you in generating wealth or providing long-term income. Conversely, bad debt typically decreases in value rapidly and does not add any value to your wealth or earn a long-term return. To give you some knowledge, the following provides some examples of each of these types of debts.

Property

The price of land has historically increased in time, so obtaining a home loan is considered a good debt because the value of your land will increase with time. Also, mortgages typically 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 exchange

Securing a loan to invest in the stock exchange is also regarded as good debt considering that the returns on the stock market are historically favourable. Lending institutions normally view stock exchange loans as good debt because you are aiming to enhance your wealth with time through a sound investment. Be careful though, it’s not a good idea to invest in the stock exchange unless you have an adequate amount of knowledge.

Education

Another type of good debt is investing in your education, whether it be university or a trade, simply because it enhances your skills and your capacity 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 traditionally the worst type of debt a person can have. Credit card debts demonstrates to lending 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 generally have complications in securing future credit from lenders.

Vehicles and consumer goods

Another type of bad debt is loans for vehicles and other consumer goods. When you obtain a loan to buy a car, it instantly decreases in value when you drive it out of the dealership. The same applies to consumer goods like flat screen TVs, because you are ultimately paying interest for something that depreciates in value very quickly.

Borrowing to repay debt

If you find yourself in a position where you have to secure a loan to repay existing debt, it’s best to seek financial support as quickly as possible. This kind of borrowing will only cause further money problems, and the sooner you act, the more choices will be available to you to resolve the issue. If you end up facing a mountain of debt, get in touch with the specialists at Fresh Start Solutions Adelaide on 1300 818 575, or alternatively visit our website for more information: http://freshstartsolutions.com.au/bankruptcy-adelaide

 

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