Understanding Debt [Part I]


Statistically speaking, it’s very likely you’re in debt.  Although the data is all over the place, most people agree that somewhere around 80% of people (excluding minors) have debt.  There are many ways you can borrow money, so I wanted to take a look at the different types of debt and my thoughts on each.  In part I, we’ll discuss credit card debt, student loan debt, payday loans, vehicle loans, and personal loans.

1.) Credit Card Debt

The average credit card debt per household with credit card debt is $15,799.  Considering the average APR on a credit card with a balance is 13.1%, people are wasting way too much money paying interest.  I have yet to meet anyone who has purposely gone into deep credit card debt.  It happens slowly.  A little emergency comes up, you take a vacation you can’t afford, or you just can’t seem to stop buying new clothes.  Either way, it tends to creep up on people.  Credit card debt is a major problem in our country and I suggest staying away from them at all costs.

2.) Student Loan Debt

This one is a major hot topic.   I used to think that student loan debt was a necessary evil.   The more I read, talk with experts, and work with clients who have tons of student loan debt, I am convinced that student loan debt is also a terrible idea.  In fact, delinquency rates on student loans are now higher than mortgages, home equity loans, and auto loans.  Credit cards are the only other debt that has a higher delinquency rate.  Not only that, but you cannot bankrupt student loans.  Contrary to popular belief, it is possible to go to college without debt.  Working hard to get merit scholarships, having a job (or two) while in school and in the summer, and utilizing community and in-state schools are just a few ways to make it happen.

3.) Payday Loans

Payday loans are a terrible way to make poor people poorer.  If you notice, there usually are not millionaires filing in and out of a payday loan store.  It’s a place for desperate people to go to find money and they pay dearly for it.  The APR on most payday loans range from 390% to 780%.  Wow!  How would you like to pay that rate on your mortgage?  You woudln’t and you also shouldn’t get anywhere near a payday loan store!

4.) Vehicle Loans

Vehicle loans are not a terrible thing.  Most people have them and most  people always will.   There are nothing like credit cards or payday loans in terms of interest rate.  There are two problems I do have with vehicle loans, though.  First, when you do not have a vehicle loan and instead, pay yourself a car payment to your savings, then  you have much more flexibility.  There have been quite a few months when things have run tight for Mandy and I and we simply didn’t put our “car payment” into our savings that month.  If we would have had to make a car payment, that would not have been an option.  I am not sure what we would have done other than raid our emergency fund, which we try to avoid if at all possible.  The second problem is that people often buy cars they cannot afford when buying with payments.  By saving and paying cash for a car, it is impossible for Mandy and I to buy something we cannot afford.  We either have the money or we do not.  I have met with way too many people who have a  $25,000 with a $40,000 a year income.  That is just crazy and I have only seen it happen when someone buys with a vehicle loan.

5.) Personal Loans

To be clear, by personal loans, I mean borrowing from a friend or family member.  Not a good idea.  It really changes the dynamics of the relationship.  For example, instead of just Dad/Daughter, it is now Lender/Borrower.  It often leads to an inappropriate amount of control in the life of the borrower by the lender.  Personal loans are certainly better than payday loans, but I suggest avoiding them as well if at all possible.

In part two, I discuss medical debt, home equity loans, unsecured bank loans, and mortgages.  Stay tuned and let me know what you think so far!

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