Debt isn’t always bad. In fact, there is such thing as good debt. It all depends on the purpose of your loan, and whether or not your purchase can generate income.
Good debt occurs when your loan assists you purchase a wealth-building asset: something that generates income or increases in value over time.
Debt incurred when purchasing a home or investment property is usually considered good debt, as long as you can afford the repayments. A property is likely to appreciate in value over time. And, in the case of an investment property, income from rent can help you pay back the loan.
Once you have paid out the loan, you are left with something of value – a property to live in that can increase in value, or an investment property that generates income.
However, if you try to use good debt to pay off bad debt, it may end up costing more. For example, if you take out a $205,000 home loan, and use $5,000 to pay off credit card debt, you will be spreading the repayments over a longer period of time. You will end up paying even more interest on the debt.
Taking out a loan in order to pay for consumer items, such as luxury goods, cars, and holidays, is considered bad debt. These products will not produce income, and will not appreciate in value. Credit card debt is considered bad debt.
However, if you effectively manage bad debt, it can positively affect your cash flow. For example, if you have a savings account with a high interest rate, you may not wish to withdraw money out of that account. In case of an emergency, you can use a credit card rather than your savings account, as long as you pay it back promptly. That way, you earn interest on your savings.
If you are looking to take out a loan for a new home or an investment property, let us help you. Give us a quick call on 02 9068 6644 or send us an email.