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 daily lives. Whether or not you would like to advance your skills by earning a degree, invest in a home for your family, or buy a car so your family has transport, securing a loan is very common simply because we don’t have enough money to pay for these expenses upfront. It appears that most people obtains a loan at one point or another, so what’s the problem?

The problem is that a lot of individuals don’t recognise the difference between good debt and bad debt, and as a result, they take on too much bad debt which can lead to substantial financial problems in the future. Not all loans are created equal, and commonly you’ll find an incredible difference between your credit card interest rates and your mortgage interest rates. Over time, your credit report will have a meaningful effect on your borrowing capacity, so paying your bills on time and not defaulting on any loans is paramount, along with keeping a healthy balance between good debt and bad debt.

Each time you request a line of credit, your lending institution will check your credit report to assess your financial history and then determine whether they’ll authorise your loan. Too much bad debt on your credit report will be viewed detrimentally by creditors, as it displays poor financial decisions and behaviours. To make sure that you maintain healthy financial practices, 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 normally an investment that will increase in value in time and will support you in generating wealth or providing long-term income. Meanwhile, bad debt commonly decreases in value quickly and does not add any value to your wealth or create a long-term return. To give you some insight, the following provides some examples of each of these types of debts.

Property

The price of property has historically increased over time, so securing a mortgage is considered a good debt because the value of your property will increase with time. At the same time, home loans usually have low interest rates and a long term, normally 20 to 30 years, which indicates that the value of your land can double or triple during the life of your loan.

Stock Market

Obtaining 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 generally view stock market loans as good debt because you are striving to improve your wealth over time through a sound investment. Be careful though, it’s not wise to invest in the stock market unless you have a sufficient amount of knowledge.

Education

Another type of good debt is investing in your education, whether it be university or a trade, given that it boosts 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 appealing option.

Credit cards

Credit cards are normally 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 remarkably 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 lenders.

Cars and consumer goods

Another kind of bad debt is loans for vehicles and other consumer goods. When you get a loan to purchase a vehicle, it immediately 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 quickly.

Borrowing to repay debt

If you find yourself in a situation where you have to get a loan to repay existing debt, it’s best to seek financial guidance as soon as possible. This type of borrowing will only lead to further money problems, and the sooner you act, the more opportunities will be available to you to resolve the issue. If you find yourself facing a mountain of debt, phone the specialists at Fresh Start Solutions Hobart on 1300 818 575, or alternatively visit our website for additional information: http://freshstartsolutions.com.au/bankruptcy-hobart

 

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