It is important for all us “borrowers” to understand the difference between Good and Bad Debt.
The reason we should borrow money is to purchase things that we cannot afford in one hit such as a House or a Car. Not smaller items such as a Television or even a computer. Also try to remember that buying goods that we don’t “need” on credit can often get us into trouble! And these are often the so-called Bad Debts.
In broad terms, a Good Debt can be a loan such as a Home Loan to purchase a home or investment property that will rise in value over time, or a Margin Loan, used to buy shares or investments. A loan in any form (even a car loan) that is used for business or investment may be tax deductible which is a big incentive.
Bad Debts are not Tax deductible and used to purchase smaller items that are not essential in our daily lives. Credit Cards & Personal Loans are examples of these, which we often use to finance our clothes, holidays etc…
Tips for paying off your debts
– Pay off all the Bad Debts first, starting with those that have the higher interest rates eg Credit cards & then Car loan
– Make extra payments whenever possible to your home loan as it will save you thousands of dollars in interest and shorten the loan term eg a $300,000 mortgage over 30 years at 7% interest with an extra payment of only $200 per month will save you 7 years & $116,639 in interest
– If you do have a lot of equity in your home, you can consider refinancing your home loan and paying off all your Bad Debts with it. Of course this will increase your mortgage balance and repayments
– Minimize new borrowings unless they are Good Debts (seek advice from your accountant as required)
If you do have a lot of Bad Debt such as credit cards, personal loans etc.. and have minimal equity and savings and are struggling to keep up repayments – give Debt Negotiators a call on 1300 351 008 and we can help you to consolidate and pay off these debts with one easy payment.