June 26, 20180

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

Posted by:Charles Bosse onJune 26, 2018

For most Australian adults, debt is a part of our day-to-day lives. Whether you wish to advance your skills by obtaining a degree, invest in a home for your family, or purchase a vehicle so your family has transportation, taking out a loan is very common simply because we don’t have enough money to pay for these expenditures upfront. It appears that everyone takes out a loan at one point or another, so what’s the concern?

The issue is that too many individuals don’t realise the difference between good debt and bad debt, and consequently, they take on too much bad debt which can lead to substantial financial problems in the future. Not all loans are created equal, and generally you’ll discover a vast difference between your credit card interest rates and your home loan interest rates. As time go on, your credit report will have a serious impact on your borrowing capabilities, so paying your bills on time and not defaulting on any loans is essential, coupled with keeping a healthy balance between good debt and bad debt.

Each time you request a line of credit, your financial institution will review your credit report to determine 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 lenders, as it exhibits poor financial decisions and behaviours. To make sure that you maintain healthy financial habits, it’s vital that you comprehend 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 frequently an investment that will increase in value with time and will support you in generating wealth or providing long-term income. Conversely, bad debt commonly decreases in value quickly and does not add any value to your wealth or generate 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 land has historically increased over time, so acquiring a home loan is considered a good debt because the value of your land will increase with time. Additionally, home loans typically have low interest rates and a long term, normally 20 to 30 years, which reveals that the value of your land can double or triple during the life of your loan.

Stock Market
Getting a loan to invest in the stock exchange is also regarded as good debt simply because the returns on the stock market are historically favourable. Lenders usually view stock market loans as good debt because you are attempting to increase your wealth with time through a firm investment. Be careful though, it’s not a good idea to invest in the stock market unless you have a sufficient amount of knowledge.

Education
Another kind of good debt is investing in your education, whether it be university or a trade, given that it enhances your skills and your ability 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 generally the worst type of debt an individual can have. Credit card debts demonstrates to lenders that you have poor financial habits because the interest rates are incredibly high and you have nothing in value to show for your investment. Folks with credit card debts frequently have issues in receiving future credit from loan providers.

Cars and consumer goods
Another kind of bad debt is loans for cars and other consumer goods. When you get a loan to buy a car, it immediately decreases in value when you drive it out of the 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 quickly.

Borrowing to repay debt
If you find yourself in a situation where you have to secure a loan to repay existing debt, it’s best to seek financial advice as soon as possible. This type of borrowing will only generate further money problems, and the sooner you act, the more options will be available to you to resolve the issue. If you end up facing a mountain of debt, call the professionals at Fresh Start Solutions on 1300 818 575, or alternatively visit our website for additional information: https://freshstartsolutions.com.au

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