There is no doubt that credit has increased the purchasing power of Americans. Without it, many of us would not have access to homes, cars and other everyday items. However, this dependence on credit has also normalized debt in the United States.
With consumer debt now standing at $ 14.96 trillion and the average consumer at $ 92.727, it’s important to understand how different types of debt can affect your future and your finances.
Want to know more about the different types of debt? We’ll take a look!
1. Credit card debt
One of the most common types of debt is credit card debt. Credit cards are the favorites of consumers who value immediate access to the goods and services they provide. On top of that, credit cards also help you build your credit score and earn rewards. But all of this comes at a high price.
Ninety percent of American adults have at least one credit card on their reports. But rather than paying the full amount each month, up to 75% carry over their credit card balance, with the average balance now at $ 5,315. This type of revolving, unsecured debt means you are earning significant interest. And if you miss a payment, you’ll also have to pay late fees.
As such, it is best to erase credit card debt as soon as possible. This is where a debt consolidation loan can help. The Plenti Debt Consolidation Loan comes with a personalized rate and a peak rate promise for the smartest and fastest way to consolidate your debt.
2. Auto loan debt
Most consumers don’t have the funds to pay for a vehicle up front, so they take out a secured car loan, using the car as collateral. Two-thirds of American adults have at least one car loan, with an average debt of $ 19,703.
Financing a car in this way means that whoever lent you the money is claiming ownership of your vehicle. As such, if you stop making payments for whatever reason, the lender can repossess your shiny new wheels. But, one of the pitfalls of auto loan debt is that your car will never be worth what you paid for it, so you could find yourself at a loss even more than before if you fail to honor your repayments.
3. Mortgage debt
The best example of “good” debt is mortgage debt, in which the house you pay off in monthly installments serves as collateral for your secured loan. But, unlike auto loan debt, a big plus is that you are purchasing a high value asset that will almost certainly be worth even more once you finish paying it off.
Forty-four percent of American adults have this type of debt, with an average mortgage balance of $ 208,185. So it should come as no surprise to learn that mortgages represent the largest amount of debt outstanding in the United States.
Like any debt, you will have to pay interest on a mortgage loan. But when you’re talking about big numbers and payment plans spanning a few decades, that interest can add up to a hefty sum. For example, if you take out a mortgage loan of $ 250,000 over 30 years at an interest rate of 3.8%, by the time you finish paying, you will have paid out almost $ 420,000 – yuck!
4. HELOC Debt
Home Equity Lines of Credit (HELOC) are loans that allow homeowners to use their property as collateral. You can use that equity in your home to pay off other debt, finance a new purchase, or finance a home improvement project. About 12% of Americans have a HELOC account with an average debt of $ 41,954.
5. Personal loan debt
Personal loans allow you to borrow a fixed amount of money and repay it over time, often with a maximum term of ten years. Consumers can use these funds to cover all the expenses they need, from debt consolidation to emergency expenses. Almost a quarter of American adults have this type of debt on their credit on their reports, with the average personal loan debt standing at $ 16,458.
Personal loans can be secured or unsecured. Secured personal loans involve borrowing money using your house, car, or other item as collateral, while unsecured personal loans are not tied to an item you own. Since unsecured personal loans are riskier for lenders, they come with a lower maximum loan amount and higher interest rates than secured loans.
6. Student loan debt
Higher education would be out of reach for millions of Americans without access to student loans that help them finance their education. For this reason, many people see student debt as another example of “good” debt since you are using the money you borrow to improve an asset. But, in this case, you are the trump card.
That said, there are other ways to lower the cost of higher education and your chances of accumulating student debt. These include choosing directional schools, working alongside your studies, or applying for grants and scholarships.
7. Medical bill debt
With only the best insurance policies covering 100 percent of medical bills, it’s common for Americans in need of health care to rack up bills they often don’t have the resources to pay. In fact, about 137 million Americans have unpaid medical debt on their records, with 28% of them owning $ 10,000 or more.
Unlike other types of debt, however, there is room for negotiation when it comes to medical bill debt. By facing the problem head-on and talking to your hospital or health care provider, you can verify your eligibility for financial assistance, pay lower rates, or develop a payment plan that you can afford. Or, if you have medical debts with multiple health care providers, you might prefer to take out a debt consolidation loan so that you only have to deal with one creditor and one monthly payment.
Understanding the different types of debt
While there are many types of debt, the one thing they all have in common is that the best way out is to pay off what you owe as quickly as possible.
Otherwise, debt consolidation is a useful tool to help you stay on top of your finances and establish a reasonable repayment plan that is within your means and preferences.