There are many different types of debt in the market, each designed with a specific purpose in mind. For example, home loans, investment loans, car loans, and credit cards. Despite their differences, they often have a common feature – you borrow a sum of money and repay it over time, with interest. In terms of credit cards, interest can incur on outstanding balances.
When looking at the Reserve Bank of Australia’s latest figures on Australian households, namely the level of household debt to annual household disposable income (currently sitting at 189%), it’s clear that debt plays an integral part in our lives. For example, it can assist in the purchase of things, which would ordinarily not be possible with our income alone and can allow us to smooth expenditure costs over a specified period. Despite its pervasiveness, it’s important to remember that whilst debt can lead to positive outcomes (e.g. wealth accumulation), it also has the potential to lead to negative ones (e.g. bankruptcy) if not appropriately managed. Consequently, in this animation, we explore the concept of good and bad debt, and the importance of appropriate debt management.