Debt is defined as owing money, owed money that is past due or the feeling as if you owe someone something. An example of debt is what you owe on your mortgage and car loan. An example of an emotional debt is a feeling of gratitude when someone helps you to go to college. That is a positive but emotional debt. But it’s no fun to be in debt thousands of dollars for most purchases because it can have a negative effect on your future.
What are the types of debt? Mortgages, auto loans, personal loans, credit card debt
The most common forms of debt are loans, including mortgages and auto loans, personal loans, and credit card debt. There are different terms of a loan, the borrower is required to repay the balance of the loan by a certain date, typically several years in the future.
The loan also stipulates the amount of interest that the borrowers are required to pay annually, expressed as a percentage of the loan amount. Interest is used as a way to ensure that the lender is compensated for taking on the risk of the loan while also encouraging the borrower to repay the loan quickly in order to limit the total interest that you well spend, and your cost of borrowing.
Credit card debt
Credit card debt works very much the same way as a loan, except that the credit card amount changes over time according to the persons use of credit, up to a predetermined limit, and has a rolling, or open-ended, payment date. You can also consolidate your debts, just be careful of the cost to use the money.
Congratulations! You’re pre-qualified for a loan!
How many offers of “you are prequalified” letters have you received for loans and credit cards? What does that really mean because prequalifying does not mean you are getting the loan it’s a marketing tool to get you to apply. You need to be careful about how many times you do apply it could affect your credit score and that is another subject for my next blog.
Good Debt Vs. Bad Debt
Debt can be good, and it can be bad. Borrowing money for an asset that has value is considered good debt if you can afford to pay. However, credit card or unsecured debt can become dangerous and cost a lot more than what you bought with it, the interest can be from 0% up to 29.5 and more. That is the cost of using this money and the risk the lender is taking with you as if your credit score is low, then the risk is high to the lender and they will charge you for taking the risk.
Just remember when you use a credit card can you pay it back in a month or three months. Plan on not just buying something you want, and plan how fast you can pay for it, so that you will have minimized the cost. Use the tool I learned a long time ago: ask yourself, do you want it, or do you need it?
Debt snowball calculator
Take a look at this calculator to see how you can get out of debt more quickly if you pay extra on your debts.
Lillian Meyers CFP®, CDFA®, EA is a financial planner in Sonoma, California helping clients with Financial Coaching. She has decades of experience assisting clients in living their best life through the use of financial planning, investment management, and other sophisticated financial options.