What is the difference between good and bad debt?
It's hard to predict what's going to happen in our lives. Throughout your years, you can experience a number of unexpected costs and financial hurdles, sometimes putting you under pressure.
At times, this can sometimes lead you to borrow finance such as personal loans or credit cards in order to cover these unexpected costs. And this can leave you with debt.
What is debt?
You acquire a debt whenever you have to borrow money and pay someone back. Usually, this will mean you have to pay interest to your lender on any amount that you owe, whether it's a bank, small loan provider or even family member.
The interest that gathers up can add up to a sizeable amount on top of what you originally borrowed. Sometimes this can be due to extremely high interest rates, especially with small debts like hire purchases and credit cards.
Even though you're borrowing money that you have to pay back with interest, not all debt is bad. In fact, there's such a thing as good debt.
Good debt occurs when you buy something with borrowed finance that actually grows in value. For example, picture if you invested in a Queensland rental property with borrowed funds through your home loan. This asset is going to grow in value and potentially provide you with more money in the future once you sell it and pay off your mortgage. At the same time, your property can provide you with regular income through the form of weekly rent, helping you to gradually pay off the mortgage that you used to buy it.
On the other hand, there's also bad debt. This occurs when you purchase something with borrowed funds that doesn't grow in value. Taking out a personal loan to take the family abroad for a few weeks is a good example of this. It might be a nice trip away for everyone, but it's not an investment like a property is. It's not something that can grow in value or provide you with financial benefits in the future.
Making the most of good debt
Good debt can go a long way to helping you achieve both your financial and life goals. If you already had an existing loan for the home you live in, you can simply refinance your mortgage to cover the costs of an investment property.
There's also the option of using good debt to pay off others. For instance, a debt consolidation loan through your mortgage allows you to incorporate other debts you might have. This could be credit cards, personal loans or even hire purchases.
The key to reaching your goals is being able to manage your debt appropriately. Life's too short to worry about debt and changing your lifestyle to reflect that. Instead, speak with an expert wealth coach to figure out how to make your debt work for you.