Not all debt is bad, there is also a thing called good debt. We take a look at the difference between the two and how you can apply it to your current or future investments!
Good vs. Bad
Good debt allows you to build wealth by using other people’s money for investment. Provided the cost of servicing this debt is manageable and the assets purchased is solid, it may be a sound financial tool for you. We suggest that you seek professional advice if you think this may be suitable for you.
Bad debt is debt used to purchase consumer items such as household furniture and appliances, holidays and credit card debt. It is usually far more expensive and ties up valuable resources that do not build wealth.
Common types of Debt
Car Loans are often unavoidable but are still bad debt. If you must borrow to purchase a car, try to repay the debt within three years. Before you buy your next car, start saving a sizeable deposit, keeping in mind your goals for saving.
Home Loans are a lifestyle choice. If you want to be successful in building wealth and your income is not extremely high, choosing a home you will not need to replace is a good strategy to consider. Try not to spend more than four or five times your salary. Only buy a house with a minimum 20% deposit and one where you can repay the loan within 15 to 20 years. By having a 20% deposit, you may not pay high Mortgage Insurance.
Investment Property Loans are a very popular, powerful force in building wealth provided they are used sensibly. Deposits should be substantial, and the income after tax advantages should support the majority of the loan repayments. Any savings from your salary can be used to make additional payments. Thus, if your financial circumstance changes for the worst, you may be protected from a fire sale if you are ahead in your payments.
Margin Loans for purchase of shares are an option and should not be considered until you have proved your ability to manage a share portfolio efficiently in both rising and falling share markets. Interest Only loans rely on increasing profits that are released when the shares are sold. Again we suggest that you seek professional advice if you think this may be suitable for you.
Financial Mappers is your Personal Financial Management Hub and gives you the power to independently tailor your financial plan and compare financial products. With Financial Mappers, you can explore various loan formats together with Interest Rate Risk Assessment.
Disclaimer: Financial Mappers does not have an Australian Financial Services License, does not offer financial planning advice and does not recommend financial products.