Debt is something that can weigh heavily on your life and financial situation
But not all debt is created equal, the right kind of debt can help you acquire capital and invest in yourself. Here is a breakdown of the main types of debt so you know what type to avoid and what type won’t hurt your financial well being.
Let start with bad debt you should try to avoid so you can save for retirement and increase your net worth.
Bad debts are used to pay for things most people want instead of need. These types of debt usually lead to excessive spending sprees on credit cards, new cars that decrease in value or other high-interest loans.
Credit card debt tends to be the worst debt as the average American household owes more than $16,000 in credit card debt. This debt is created from overspending and usually comes with high-interest rates that make it nearly impossible to catch up.
At Bayntree, we recommend using credit cards to build your credit score but pay in full every month to avoid high-interest rates. If you have debt, start by paying off the highest interest credit card first and work your way backward until you are debt free. Find ways to cut expenses or earn more money to eliminate this debt as fast as possible.
Auto loan debt is another bad debt with the average loan being $30,032. Cars are depreciating assets which means they lose value over time. New cars especially, they lose 20% of their value almost immediately after they are driven off the lot.
While a large percentage of Americans need transportation don’t overextend yourself with a high priced auto loan. Try to purchase a used car if you have other debts to keep monthly payments to a minimum.
Consumer loans aren’t as popular as credit card or auto loans but are still considered bad debt as they tend to carry interest rates are between 10-28%. The lower your credit score the higher the interest rates.
Debts that are considered good are seen as investments in your future. You are borrowing money to build equity in a house, an education that will help your future earnings or a business that will help produce income.
Student loan debt is a necessary evil for most people and 70% graduate with them. Americans owe over $1.48 trillion in student loan debt which is divided amongst 44 million borrowers. The crazy part is that outstanding student loan debt is twice of the total US credit card debt.
The average college student who takes on debt ends up with $37,172 at graduation. But this debt is an investment in yourself, your future, and your earning potential.
Unlike consumer interest loans, business loans are to help you grow and expand your business to produce more income. Business loans are often necessary for expansion, equipment or acquiring another company.
When getting a business loan be sure to know the details of the loan. Understand what the APR will be and if there are any prepayment penalties.
The most popular type of good debt is a mortgage. You have to live somewhere and renting a place is just lost money. Buying a home is typically a good investment as historically houses have risen in value and carry very low-interest rates.
Additionally, you can access the equity of your home over time with a home equity line of credit. You can use your home equity to help pay for major expenses such as home improvements or children’s college educations.
Ultimately you want to avoid bad debt like credit cards and car loans while enjoying the benefits of good debt to invest in your future.
Want to learn more about what this means for you? Request a call from a Bayntree advisor today.
Bayntree Wealth Advisors, located in Phoenix and Scottsdale, Arizona, provides comprehensive financial planning and wealth management. The Bayntree team specializes in all aspects of financial health, including retirement planning, risk management, investment advice, tax strategies, estate planning and insurance.
Bayntree does not provide specific legal or tax advice. Please consult with your tax advisor or legal professional for guidance with your individual situation.