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 almost all Australian adults, debt is a part of our daily lives. Regardless if you intend to further your skills by earning a degree, buy a property for your family, or purchase a car so your family has transport, taking out a loan is very common simply because we don’t have enough money to pay for these expenditures upfront. It seems that everyone obtains a loan at one point or another, so what’s the problem?

The trouble is that lots of 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 lead to considerable financial problems in the future. Not all loans are created equal, and commonly you’ll find a tremendous difference between your credit card interest rates and your mortgage interest rates. Eventually, your credit report will have a notable impact on your borrowing capabilities, so paying your bills on time and not defaulting on any loans is important, alongside keeping a healthy balance between good debt and bad debt.

Each time you request a line of credit, your loan provider 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 creditors, as it exhibits poor financial decisions and behaviours. To make sure that you maintain healthy financial practices, it’s vital that you have knowledge of the difference between good debt and bad debt.

What’s the difference?

The difference between good debt and bad debt is relatively straightforward. Good debt is normally an investment that will increase in value with time and will assist you in creating wealth or providing long-term income. Conversely, bad debt primarily decreases in value quickly and does not add any value to your wealth or yield a long-term return. To give you some insight, the following offers some examples of each of these types of debts.

Property

The price of land has traditionally increased with time, so acquiring a home loan is considered a good debt because the value of your property will increase over 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

Securing a loan to invest in the stock market is also deemed to be good debt since the returns on the stock market are traditionally favourable. Lenders usually view stock market loans as good debt because you are striving to improve your wealth with time through a firm investment. Be careful though, it’s not a good idea to invest in the stock exchange 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 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 appealing option.

Credit cards

Credit cards are commonly the worst type of debt an individual can have. Credit card debts demonstrates 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. Individuals with credit card debts generally have troubles in securing future credit from lenders.

Vehicles and consumer goods

Another kind of bad debt is loans for cars and other consumer goods. When you take out 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 ultimately paying interest for something that depreciates in value very quickly.

Borrowing to repay debt

If you find yourself in a position where you need 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 options will be available to you to resolve the issue. If you end up dealing with a mountain of debt, reach out to the professionals at Fresh Start Solutions Darwin on 1300 818 575, or alternatively visit our website for more information: https://freshstartsolutions.com.au/bankruptcy-darwin

 

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