6 Common Types of Debt
If you have debt, it’s important to remember that you are not alone. With so many different types of debt to fund your needs and wants, it is not surprising that many people have a debt of some kind.
Taking the time to understand the different types of debt available to you can be useful. There are six common types of debt, including mortgages, student loans, auto loans, and more.
Let’s take a closer look at the different major types of debt and whether they are good or bad.
What Is Good Debt vs. Bad Debt?
Before looking at different types of debt, it’s critical to understand that debt falls into two categories. These include good debts and bad debts.
Although many people feel that all types of debt are bad, there are varying degrees of good and bad. In general, some types of debt are better than others.
Bad debt includes high-interest debt on things that aren’t ‘needs’ or are depreciating assets. For example, taking on credit card debt with a high interest rate to cover a vacation falls into the bad debt category.
On the flip side, good debt includes appreciating assets like your mortgage. In some cases, student loans can also fall into the ‘good’ debt category. However, this is only the case if the education earned helps increase your income potential.
Related: 11 Dangers of Debt and How to Avoid Them
6 Common Types of Consumer Debt
People take on debt for many reasons. Here are the most common types of consumer debt.
1. Mortgage
A mortgage is a loan secured through a real property asset. Your lender has the right to take your property if you can’t keep up with the payments. In many cases, mortgages have relatively low interest rates when compared to other types of debt.
With a mortgage, you will presumably have a place to live while paying off the loan. Additionally, your home is likely an appreciating asset. All in all, mortgages are good debt.
However, a mortgage can cross the line into bad debt if you are overspending on your mortgage payments. Many experts recommend spending no more than 30% of your income on housing costs. If you are spending too much on your mortgage, it could take a crushing toll on your budget.
2. Student Loans
Student loans are one of the most common types of debt in the United States. Research has found that Americans owe more than $1.7 trillion in student loans.
In terms of if student loans are good or bad debt, it depends. Although they can be a hefty burden, student loans also come with the opportunity to pursue higher education. In some cases, this can help increase your earning potential. With that, student loans can be a good debt.
However, student loans can fall into the bad debt category when the education received doesn’t allow you to command a higher salary in the workforce. Before you take out a student loan, it’s smart to evaluate whether or not it will be worth it in the long run.
3. Auto Loans
Auto loans are another type of secured loan. The lender will secure the loan with your vehicle. If you can’t repay the loan according to the timeline, then the lender has the right to take your car.
In most cases, auto loans are considered bad debt. That’s because vehicles are notorious for losing value quickly. In fact, new cars can lose thousands of dollars in value just minutes after driving off the lot. With that, auto loans are something you want to avoid, if possible.
That said, you might need a car to get to work. If that’s the case, try to minimize your debt burden by choosing a more affordable vehicle.
4. Credit Cards
Credit cards are not necessarily bad on their own. In fact, the right rewards credit card can help you save thousands through points and cash back. However, credit card debt is considered a type of bad debt.
Credit card debt often comes with an extremely high interest rate, making it difficult to repay the loan. Unfortunately, the portable nature of credit cards makes it all too easy to tap into your line of credit when your budget is stretched with expenses, or you want to splurge.
It’s advisable to make sure you always pay off your cards in full and on time to take advantage of the benefits of credit cards while avoiding the negatives of credit card debt.
5. Medical Debt
If you encounter a medical emergency, you have to do what you need to do better. This might mean an expensive medical procedure or medication.
It is amazing that the opportunity to get better is there when you need it. However, sometimes medical debt is unavoidable. Even those with extensive emergency funds may find themselves scrambling when an unexpected medical bill comes their way.
Medical debt can be a good thing if it’s a necessity and helps you regain your health. That said, it’s important to take steps to pay it off quickly.
6. Payday Loans
A payday loan might just be the worst kind of debt. With a payday loan, you receive a cash advance based on your paycheck from a lender that will expect payment quickly.
The interest rates attached to payday loans can be outlandish. Studies have shown that the average interest on a payday loan is 391%. That’s so steep that anyone will likely struggle to pay it back, creating a cycle of payday loans to keep up with the incoming bills.
If at all possible, avoid payday loans. Even credit card debt is a better option.
Related: What is Tax Debt? How Can I Pay It Off Quickly?
How to Deal With Common Types of Debt
If you have debt, chances are you want to eliminate this financial burden from your life at some point. The good news is that it is completely possible to pay off your debt.
The first step is to create a plan. With the help of a free Undebt.it account, you can explore your repayment options. Regardless of which of the Undebt.it debt payoff plans you use, starting your debt repayment journey is easier when you can visualize your journey to success.
Once you have a goal in mind, start working towards it. You can even speed up the process by reducing your spending or tackling a side hustle.
Related: 7 Effective Ways to Pay Off Debt Fast
The Bottom Line
Are you ready to eliminate debt from your life? That’s great! The first step is to get motivated and make a plan.
That’s where Undebt.it can help. Take advantage of Undebt.it to create a plan to tackle your debt, regardless of the type, once and for all.
