Bad Debt

The level of personal debt is an ever-increasing worldwide problem.  The main reason for this is that credit is so easy to get.  Yet, every month when you receive all those mounting bills, you feel like you're trapped and wish to run away.  It must be noted though that not all debt is bad.  Hard as it might be to believe, there is good debt.

When used correctly, debt can be of great help if used to build wealth.  Good debt is debt that is used as an investment that will ultimately create value to you.  Debt like business loans, home mortgages, real estate loans and student loans fall into the good debt category.  You will ultimately gain something of value by using this type of debt. 

In the case where you are considering a method of debt reduction for your current debts, you could say that you are looking for good debt.  If you were to opt for a home equity loan at a tremendously reduced interest rate to repay a credit card loan which carries a very high interest rate, that's good debt.   You will benefit from the reduction in interest rates. 

Generating debt to invest in bonds, high return stocks or any other high yield investment is usually good debt.  The same applies to purchasing a home as the property will generally increase in value over the period of the loan.

Bad debt raises its head when you purchase goods that have very low future value by using high interest store or credit cards.  This fact is exacerbated if you do not settle the full balance of your card when it is due.  Financial institutions charge incredibly high rates of interest on credit cards and if you only pay the minimum balance due, the amount that you are paying for consumables increases dramatically.

Another item that is readily purchased by making use of loans is a motor vehicle.  The fact that vehicles are quite expensive, so very few people are able to pay cash for this purchase, pushes it into the bad debt category.  Most people purchase car models that they do not actually need.  This dramatically increases the bad debt value of the purchase.  When you consider that the moment you drive your car out of the sales showroom, it depreciates by at least 10%, you have already opted for a bad debt.

If you find yourself in debt, take a look at the value of good to bad debt.  Strive to settle the balances on the bad debts as this is where the cost of debt is much higher.  Then you should focus on settling your good debt so that you can become debt free. If you want advice on how to get out of debt, make sure you give us a call on 02 9631 2223 because at Declare Bankruptcy, we will solve your problem!