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Good Debt Versus Bad Debt

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The difference between good and bad debt is essential to understand and recognize.

Owning your own home, cars, dining out, and generally enjoying life all cost money and create debt.

While debt is an essential part of everyday life, it can also wear out its welcome and wear down your desire to dream of a better tomorrow.

One of the reasons so many Australians are restricted in their ability to achieve their financial goals is that they are simply ‘drowning’ in debt.

When you are deep in debt, you restrict your ability to build wealth before you’ve even had the chance to start.

That’s why you need an effective debt elimination strategy, a customized plan of action, and a clear understanding of the difference between ‘good’ and ‘bad debt.

The difference between these two types of debt can be distinguished as follows:

Bad Debt

  • It is used to make lifestyle acquisitions
  • Does not generate an income stream
  • Interest cannot be claimed as a tax deduction
  • The interest and the debt needs to be repaid from personal ‘after-tax’ income
  • Must be eliminated as quickly as possible

Good Debt

  • It is used to acquire investments
  • Generates an income and appreciates in value
  • Interest is tax deductable
  • Revenue generated from investments is used to pay off the debt

Getting into debt to finance a real estate investment is not considered bad debt. For many people, buying a home is the single most expensive investment they will ever make and the most significant amount of debt they will ever enter into.

Sometimes getting into good debt can be pretty tricky – it can be hard to qualify for your first mortgage and a difficult decision for lenders to make themselves when it comes to choosing you to loan money to.

To be granted a mortgage, there are specific criteria it is necessary to qualify for before the lending institution signs you up for that notorious 30-year loan.

To borrow money for your first mortgage, you need

  • Proof of income
  • Proof of savings
  • A deposit (in most cases)
  • Strong nerves!

Always think in terms of serviceability when it comes to borrowing money for the property — even if you know it’s good debt.

Being able to service the mortgage repayments is the most essential part of the battle.

Ask yourself these questions;

  • Can I withstand interest rate rises? If not, should I fix my rate?
  • Is my income secure enough to repay a mortgage?
  • Are my expenses too steep? What can I cut down on?
  • What is my backup plan if the mortgage gets to be too much?
  • Do I have the correct type of insurance?
  • Am I borrowing this money for the right house, in the right place at the right price?

Real estate is, unfortunately, not always an excellent debt-type transaction.

If you make the wrong decision at the outset and borrow money for an overpriced house and pay too much, you already have negative equity before you start out.

Seek advice from mortgage brokers, accountants, lending institutions, financial advisors, and legal experts before you sign on the dotted line for your first mortgage.

Start considering if each debt you incur is good or bad and make the good outweigh the bad in any way you can.



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Effie F. Bush is a 27-year-old junior manager who enjoys praying, social card games, and listening to music. She is inspiring and brave, but can also be very disloyal and a bit unfriendly.She is an Australian Christian who defines herself as straight. She has a post-graduate degree in business studies.

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