The Difference Between Good and Bad Debt

Do you know that debt can be good as well as bad? Understanding the difference between these two broad types of debt is important.

 

Good debt

Good debt is money you borrow for wealth creation purposes. It includes money you borrow to buy assets that increase in value (like property). Your home loan is an example of good debt. Australian property prices have a long-term track record of solid growth, even though there might be shorter-term flat periods or decreases in certain markets.

History shows that if you hold onto Australian residential property for the long-term, you’ll be rewarded. Your asset will increase in value over time, while your debt will progressively decrease with your repayments. Both of those factors help you to build wealth.

Bad debt

Bad debt, on the other hand, is any money that you borrow for day-to-day expenses (like groceries or bills), or to buy assets that decrease in value very quickly (like cars). Bad debt is the worst type of debt.

Credit card debt is a typical example of bad debt, especially if you’re only making your minimum repayments each month. Credit card interest rates can be three or four times higher than those for other forms of finance. If you’re only making your minimum credit card repayments, you’re turning short-term debt into long-term debt and paying way too much interest.

For example, do you know how long it will take you to repay a $2,000 credit card debt at the current average interest rate (18%) if you only make minimum monthly repayments of 2%?  Just under nineteen years!!! You’ll also end up paying $3,691 in interest.[1] Talk about bad debt!

Leveraging debt

Let’s get back to good debt and how it can help you even more. Good debt can be leveraged to not only generate wealth but also to fast-track it. For example, you can use the equity you’ve built up in your home over time as security to take out an investment property loan. Just like with your home, history shows that a well-chosen investment property in a good location in Australia generally increases in value over time.

But an investment property loan offers another benefit that your home loan doesn’t. You can deduct the interest you pay on an investment property loan against the rental income it generates. This reduces your taxable income and therefore the amount of tax you pay.

The interest on your home loan, on the other hand, isn’t tax-deductible. That’s one reason why it’s important to pay off your home loan as soon as possible.

 

How we can help

At Fast Repay Home Loan, we can help you to implement strategies to pay off your home loan as soon as possible. We can help you to become debt-free sooner or to build your wealth more quickly by leveraging good debt. We’ll take the time to understand your needs and goals so we can provide you with the best possible advice.

Call 1300 707 955 or email info@fastrepayhomeloan.com.au to get started!

 

 

[1] Figures obtained from https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/credit-card-calculator

 

 

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