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

For many Australian adults, debt is a part of our daily lives. Regardless of whether you wish to enhance your skills by earning a degree, buy a house for your family, or purchase a car so your family has transportation, obtaining a loan is very common simply because we don’t have enough money to pay for these costs upfront. It appears that most people gets a loan at one point or another, so what’s the problem?

The concern is that too many folks don’t appreciate the difference between good debt and bad debt, and as a result, they take on too much bad debt which can trigger serious financial problems down the road. Not all loans are created equal, and typically you’ll discover an enormous difference between your credit card interest rates and your home loan interest rates. Gradually, your credit report will have a notable effect on your borrowing abilities, so paying your bills on time and not defaulting on any loans is critical, alongside keeping a healthy balance between good debt and bad debt.

Each time you make an application for credit, your creditor will examine your credit report to assess your financial history and then decide whether they’ll approve your loan. Too much bad debt on your credit report will be viewed detrimentally by loan providers, as it exhibits poor financial decisions and behaviours. To make certain that you maintain healthy financial habits, it’s imperative 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 usually an investment that will increase in value with time and will help you in creating wealth or providing long-term income. On the other hand, bad debt frequently decreases in value rapidly and does not add any value to your wealth or create a long-term return. To give you some understanding, the following gives some examples of each of these types of debts.

Property

The price of property has traditionally increased over time, so acquiring a home loan is considered a good debt because the value of your property will increase with time. Likewise, mortgages typically have low interest rates and a long term, normally 20 to 30 years, which illustrates that the value of your home 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 considering that the returns on the stock market are historically favourable. Loan providers generally view stock exchange loans as good debt because you are striving to improve your wealth over time through a solid investment. Be careful though, it’s not a good idea to invest in the stock market 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, because it enhances 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 enticing option.

Credit cards

Credit cards are generally the worst type of debt an individual can have. Credit card debts reveals to lenders that you have poor financial habits because the interest rates are extremely high and you have nothing in value to show for your investment. Folks with credit card debts usually have complications in acquiring future credit from financial institutions.

Vehicles and consumer goods

Another type of bad debt is loans for vehicles and other consumer goods. When you obtain a loan to buy 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 effectively paying interest for something that depreciates in value very rapidly.

Borrowing to repay debt

If you end up in a position where you have to secure a loan to repay existing debt, it’s best to seek financial assistance as quickly as possible. This type of borrowing will only result in further money problems, and the sooner you act, the more choices will be available to you to resolve the issue. If you find yourself facing a mountain of debt, speak to the specialists at Bankruptcy Experts Cassowary Coast on 1300 795 575, or alternatively visit our website for more information: www.bankruptcyexpertscassowarycoast.com.au