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Good Debt Versus Bad Debt

The difference between good and bad debt is essential to understand and recognize. Owning your home car, dining out, and generally enjoying life all cost money and create debt. While debt is essential to 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 limit 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 action plan, 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:

Good Debt

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 debt must 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-deductible
  • 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 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 when choosing you to loan money. To be granted a mortgage, there are specific criteria 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 consider serviceability when borrowing money for the property — even if you know it’s good debt. Serving the mortgage repayments is an 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, borrow money for an overpriced house, and pay too much, you already have negative equity before starting. Seek advice from mortgage brokers, accountants, lending institutions, financial advisors, and legal experts before signing 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.


I have always enjoyed writing and reading other people's blogs. I started writing a journal as a teenager and have since written numerous books and articles. My blog is a place where I can write freely about my personal interests and those of others.

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