The debt free community would tell you there’s no such thing as good debt. I agree that most debt should be avoided. But, you need tools to understand debt rather than shame about your debt. Let’s evaluate the different kinds of debt and talk about how you can make them work in your budget.
1. Payday loans, title loans and credit cards. These are the worst debt to get yourself into. Bad debt is defined as debt for things that don’t bring value. These kinds of loans are usually for living day-To-day and do not add any value. They all generally have crazy high interest rates. So, you bought stuff and if you’re paying only the minimums you will pay forever. Paying off a credit card every month is the only one of these options that is okay. The payday and title loan companies make it very difficult to break free from them. But, do it today!
2. Leases. If you have a lease, get out as soon as possible. Sometimes, there is an early lease termination fee that is hefty but better then paying for this lease. Leases are a way to purchase a brand-new car with a lower payment. You don’t need a brand-new car. And, you don’t need the dealership telling you how many miles to drive. These are a trap and you will turn in a car at the end without getting anything for all of those payments.
3. Home Equity Lines and Reverse Mortgages. The only time to even consider a home equity line is to renovate or remodel your house. These mortgages are very dangerous because the collateral is your house. Don’t lose your house because you have these loans for small purchases and can’t even remember what you paid for them. Reverse mortgages involve when you have paid off your house but want more money to cover living expenses. So, the mortgage company sends you a check but then when you pass away or sell the house, the mortgage amount is owed to them in full. When you retire, you should be avoiding debt.
4. Car Loans. Cars lose value over time. So, you are paying interest on an item that is losing value. Sometimes, you can’t even keep up with the decline in value. That’s how you get yourself “upside-down” on your car loan. It is a good idea to purchase a used car for a little less money with a good down payment. This way you start with some value in the car. Even if you plan to drive the car for many years, sometimes, things will happen.
5. Student Loans. These are generally considered to be good debt. But, I will caution about too much. Living off of student loans is not a good idea. Why not try getting a part-time job to pay living expenses while you go to school? You could also save up money in the summer or from your high school job. People are racking up $50,000+ to get a bachelor’s degree. Really consider whether you can afford to pay back the payments. You don’t want to be a slave to these student loans for many years.
6. Mortgage. This is arguably the best debt to go into. But, remember, not that long ago, the housing market popped. The house prices in our city were growing so rapidly when suddenly, they dropped. People couldn’t sell anything and short sales became common. Make sure your mortgage is affordable for you, you have an emergency fund and you owe less on your house then it is worse. Don’t overpay or get excited about buying when prices are very high.
You really can do this. It’s called budgeting and getting your finances in order. Money stress is not healthy and there are ways to lessen your burden. Keep moving forward.