4 Common types of debt

13044485 - mini graduation cap on moneyDebt comes in a variety of forms and sizes. But no matter how you view debt, it boils down to owing money. Are you riding a nice Cadillac you purchased with an auto loan? You’re in debt! Or did you take out a student loan to finance your college education? Yep, you’re also in debt! Anytime you purchase something and you do not pay in full, you’re in debt.

Total household debt in the United States – including auto loans, credit cards, mortgages, and student debt – climbed to $14.30 trillion in the first quarter of 2020. It’s so high that it is about eight times the total household by the height of the great recession in Q3 2008.

For many people, debt becomes a vicious cycle that steals from their future happiness. This article explores the four most common types of debts and tips on how to avoid and manage them.

Mortgage

It’s every American’s dream to one day own a home of their dreams. As a result, many people take out mortgage loans to pay for a home. Little wonder mortgage debt takes up the highest percentage of debt in the United States.

Homeownership comes with several benefits, including helping to build personal wealth and financial stability. Mortgages are attractive because they are typically low interest, and also, you may qualify for mortgage interest tax deduction.

A mortgage is an example of secured debt. A secured debt utilizes a form of collateral like a house or car. If you are unable to continue making monthly payments, the mortgage lender can foreclosure your home.

Tips for handling mortgage

  • Before taking a mortgage, ensure that you have a means of making monthly payments.
  • Try to pay off your mortgage early. This grants security for you and your family (no one can take your home away from you).
  • If you’re having difficulty making monthly payments, you should consider extending the timeline of your loan. This helps to lower your monthly payment, making your debt burden more bearable while reducing the likelihood of foreclosure.

Student Loans

A college education is a means to a better life. As a result, many people take out student loans to afford their college tuition. That probably explains why it is the fastest-growing portion of all consumer debts. A student loan is usually considered as ‘good debt’ because it is an investment in your future. College graduates tend to have higher-paying jobs, which they can use to repay their debt.

Similar to a mortgage, there are tax deductions for student loans. However, unlike a mortgage, student loans are unsecured, meaning no collateral is tied to it. Student loans may become pernicious if you cannot repay because they cannot be wiped off, even if you declare bankruptcy – Ask the many people still struggling to pay the loan for an English degree they obtained in 1997.

Tips for handling student loans

  • Students should seek out scholarships to minimize the amount of loan required.
  • Work-study programs can help you make money while studying to cover part of your expenses.
  • Try income-based repayment programs.
  • Check out public service forgiveness loans and volunteering in exchange for student loan repayment.

Auto Loans

Who doesn’t like to have a fancy car? Auto loans to the rescue. But before you pull the trigger, you should know that auto loans fall into the category of ‘bad debt’, unlike student loans and mortgages. Bad debt is when you borrow money to purchase a depreciating asset that does not generate income for you. Although the interest rate for auto loans is relatively low depending on your credit score, there are no tax benefits associated with them.

Tips for handling auto loans

  • Do not take an auto loan if you cannot conveniently make monthly payments.
  • It’s important that you make try to pay off your auto loans promptly. As the vehicle depreciates, maintenance cost is expected to rise. The last thing you want to be stuck in on-going payments for too long.

Credit Cards

This is the most vicious of all types of debts. Unfortunately, the average American household carries $16,000 in credit card debt based on NerdWallet 2016 Statistics.

Credit card companies usually charge extremely high-interest rates, and the payment plan is usually designed to put the average consumer in debt for a long time. Some companies offer a Zero interest rate on credit cards for a grace period. Provided you can pay it back within that period, credit cards can be beneficial and can even help you build your credit. However, once this grace period expires, predatory interests sets in.

Tips for handling credit card debt

  • Do not be tempted to buy what you cannot afford. Develop a budget based on your income and stick to it.
  • Try to make monthly payments on time to avoid making late payment fees in addition to interest.
  • Try consolidating your credit card debts to ease repayment.
  • As you struggle to pay your credit card debt, do no rack up new debt. This traps you in the vicious cycle of debt.

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