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

Bankruptcy Port Macquarie

For almost all Australian adults, debt is a part of our everyday lives. Regardless of whether you wish to enhance your skills by obtaining a degree, purchase a property for your family, or purchase a vehicle so your family has transportation, obtaining 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 issue?

The concern is that too many people don’t understand the difference between good debt and bad debt, and consequently, they take on too much bad debt which can generate significant financial problems in the coming years. Not all loans are created equal, and typically you’ll discover a vast difference between your credit card interest rates and your mortgage interest rates. Over time, your credit report will have a vital influence on your borrowing capacity, so paying your bills on time and not defaulting on any loans is integral, as well as keeping a healthy balance between good debt and bad debt.

Each time you make an application for credit, your loan provider will check your credit report to determine your financial history and then decide whether they’ll endorse your loan. Too much bad debt on your credit report will be viewed adversely by lending institutions, as it showcases poor financial decisions and behaviours. To ensure that you maintain healthy financial practices, it’s important that you grasp 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 normally an investment that will increase in value with time and will help you in creating wealth or providing long-term income. On the contrary, bad debt primarily decreases in value quickly and does not add any value to your wealth or earn a long-term return. To give you some idea, the following provides some examples of each of these types of debts.

Property

The price of property has traditionally increased with time, so acquiring a mortgage is considered a good debt because the value of your property will increase over time. Furthermore, home loans largely have low interest rates and a long term, normally 20 to 30 years, which reveals that the value of your property can double or triple during the life of your loan.

Stock Market

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

Education

Another kind of good debt is investing in your education, whether it be university or a trade, because it improves your skills and your potential 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 a person can have. Credit card debts demonstrates to lending institutions that you have poor financial habits because the interest rates are remarkably high and you have nothing in value to show for your investment. People with credit card debts generally have challenges in obtaining future credit from creditors.

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 car, it instantly decreases in value when you drive it out of the car dealership. The same applies to consumer goods like flat screen TVs, because you are basically paying interest for something that depreciates in value very rapidly.

Borrowing to repay debt

If you find yourself in a situation where you need to get a loan to repay existing debt, it’s best to seek financial support as soon as possible. This kind 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, speak with the professionals at Bankruptcy Experts Port Macquarie on 1300 795 575, or alternatively visit our website for more information: www.bankruptcyexpertsportmacquarie.com.au

 

By | 2018-06-29T06:31:59+00:00 June 22nd, 2018|Bankrupt, blog|0 Comments

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