June 21, 2018 0

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

Posted by:Charles Bosse onJune 21, 2018

For a lot of Australian adults, debt is a part of our day-to-day lives. Regardless of whether you want to enhance your skills by obtaining a degree, invest in a home for your family, or buy a car so your family has transport, obtaining a loan is very common simply because we don’t have enough money to pay for these expenditures upfront. It seems that most people takes out a loan at one point or another, so what’s the issue?

The concern 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 generate considerable financial problems in the coming years. Not all loans are created equal, and commonly you’ll find an enormous difference between your credit card interest rates and your home loan interest rates. Eventually, your credit report will have a vital impact on your borrowing capacity, so paying your bills on time and not defaulting on any loans is integral, along with keeping a healthy balance between good debt and bad debt.

Each time you make an application for credit, your creditor will check 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 adversely by loan providers, as it showcases poor financial decisions and behaviours. To make certain that you maintain healthy financial habits, it’s vital that you are aware 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 with time and will help you in building 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 idea, the following gives 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 property will increase in time. On top of that, home loans generally 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.

Stock exchange

Obtaining a loan to invest in the stock market is also considered good debt given that the returns on the stock market are traditionally favourable. Lenders normally view stock exchange loans as good debt because you are striving to improve your wealth with time through a firm investment. Be careful though, it’s not wise to invest in the stock exchange unless you have an acceptable amount of knowledge.

Education

Another kind of good debt is investing in your education, whether it be university or a trade, considering that it increases your skills and your capability 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 normally the worst type of debt a person can have. Credit card debts illustrates to lenders that you have poor financial habits because the interest rates are exceedingly high and you have nothing in value to show for your investment. Individuals with credit card debts generally have problems in securing future credit from loan providers.

Vehicles and consumer goods

Another kind of bad debt is loans for vehicles and other consumer goods. When you take out a loan to purchase a vehicle, 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 basically 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 secure a loan to repay existing debt, it’s best to seek financial guidance as quickly as possible. This type of borrowing will only bring on 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, reach out to the professionals at Fresh Start Solutions Gold Coast on 1300 818 575, or alternatively visit our website for additional information: http://freshstartsolutions.com.au/bankruptcy-goldcoast

 

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