Understanding Personal Debt
Consumer or personal debt in the United States continues to be a pain point for many citizens. With an economy driven by debt, companies and financial institutions make it incredibly easy to obtain financing. While that’s great for those whom are well versed in budgeting and savings, most of us find ourselves getting trapped with massive debt accumulation
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There are several types of personal debt and each carry different terms that include interest rates, payback length, loan terms and so on. It all can seem overwhelming, which leads to a serious lack of understanding and uneducated use of debt.
In this article, we’ll highlight a few of the common types of personal debt and how they can impact your financial health. We also have multiple resources to help you get out of any debt you currently find yourself struggling with.
Credit Card Debt
First and arguably the easiest way to get into debt is by owning a credit card. Whether it’s a store credit card or a generic card, they all work in a similar fashion and offer one main benefit, an open line of credit. All you have to do is swipe the card and instantly purchase nearly anything you want regardless of if you can afford it.
One of the main benefits to having a credit card is it can help keep your cash flows open. More specifically, if you are looking to make a large purchase, you can finance it over the course of a few months rather than having to pay the full amount at once. Some card companies offer special 12-month financing over certain dollar amounts or have zero percent interest as an introductory offer.
However, one of the drawbacks ends up being that life gets in the way and you carry a balance. While a month or two with unpaid credit card debt isn’t the end of the world, many carry a balance for years, only paying the minimum payment. If you carry a balance, interest rates on cards can be north of 25% depending on your terms. To avoid paying high interest rates, you need to pay your balance off in full each month. This will save you stress and keep debt at bay.
If you currently find yourself with credit card debt, we can help you get out of it!
Auto Loan Debt
The next type of popular consumer debt is the auto loan. Auto loans are easy to obtain in most cases, but there are a few more hurdles you have to jump through to get an auto loan than to get a credit card. Financing a car is the typical road many travel, since vehicles are a necessity for most.
Financing a vehicle has become much cheaper as interest rates have decreased. Conservatively you can get a loan around the 5% area with respectable credit. Since borrowing is less expensive, if you want to get that new vehicle you may finance it over a few years, keeping your cash flow open.
Similar to credit cards, many people neglect to pay down their loan quickly, thus paying the full amount of interest. Also, when you go to shop for a vehicle, look to obtain financing at your local bank or credit union as they typically have more competitive rates than the dealership. If you find that your rate is a bit high, after you’ve paid on the loan for a few months you can look to refinance to a lower rate.
Last up is the home mortgage, enabling people to realize their dream of home ownership. Many loans are typically a 15- or 30-year term, with either a fixed or variable interest rate. These loans are secured by your house and typically run 90% of your homes value or lower. To avoid private mortgage insurance you’ll want to make a down payment of 20%.
For many, obtaining the status of home ownership would be impossible without the home mortgage. This allows you to stretch the cost over many years, giving you the ability to afford a home. Typically you can prepay the note, meaning you can put more towards principal each month if you wish to pay down the note.
Unlike the other two debts, a mortgage is something you get once and will only look to refinance if rates go lower. Other than that, a traditional mortgage is a fairly straightforward product.
Unfortunately, debt is one of the trademarks of modern American society. The topics addressed in this article are some of the most common personal debts you’re likely to encounter during your lifetime. Using debt as a leveraging tool can have a positive impact on your financial well-being. However, for many the debt gets out of hand and becomes a financial burden. When using debt, use it cautiously and ensure you can repay the loan quickly, saving you money on interest expense.