Debt is defined simply as money owed by one party to another. However, things can quickly become complicated. Debt can be a valuable financial tool or a burden that complicates your life, depending on your circumstances.

The best strategy to address your debt is determined on the type of debt and the amount owed. If you have a lot of debt, you may require debt relief. Just be aware of any organization that over-promises or sounds too good to be true, such as one that offers debt forgiveness.

We’ll go over the different types of debt and how to deal with them below.

Secured vs. Unsecured Debt

Debt is divided into two types: secured debt and unsecured debt.

A secured loan is one in which the borrower has committed an asset as security for the loan. Mortgages and auto loans are classic examples of secured debt. If you do not repay as promised, the creditor has the right to seize the asset, such as foreclosing on a house or repossessing a car.

Unsecured debt, on the other hand, is not collateralized. Credit card debt is a common example. That doesn’t mean you get away with it if you don’t return.

A credit card company, for example, will most likely transfer your unpaid bill to a third-party debt collector, who will then harass you for payment. If you do not pay the debt collector, it may sue you, which may result in wage garnishment. Some aggressive original creditors may sue you personally rather than through a collection agency.

Credit Cards

Credit card debt is one of the most frequent – and costliest – types of unsecured debt.

In 2020, total credit card debt in the United States is expected to exceed $416 billion. The average amount due by persons with revolving credit card debt was $7,027.

Credit card annual percentage rates, or APRs, can range from the teens to the twenties, depending on your particular credit score. Failing to pay off your entire balance each month might quickly add up.

If you’re having problems repaying your credit card debt, consider the following options:

• A debt management plan may be an option to consider. These are typically offered by non-profit credit counseling organizations.
• If you have several debts, consider if you can combine them.
• Consider a credit card with a 0% intro APR balance transfer offer.
• You may want to explore your options by consulting with a bankruptcy attorney.

Medical Debt

Medical bill debt can result from a routine doctor’s appointment or from an unexpected event such as a fractured bone or hospitalization. This form of debt can be costly, and there is no clear method to handle it if you can’t afford to pay it off all at once.

Here are some options for paying off your medical bills:

• Make a payment plan.
• Make use of a medical credit card.
• Get a consultation from a medical bill advocate.

No matter how desperate you are for funds to pay your medical bills, avoid charging them to a credit card. Most medical providers do not charge interest; transferring that debt to a credit card negates that benefit and may make it more expensive.

Student Loans

If you graduated from college in the last several years with student loan debt, you almost certainly have a substantial balance. In 2020, the average student loan balance in the United States was $56,572.

Student loans might be federal or private, with a variety of loan options available. Regardless of where the debt originated, you will most likely be repaying your student loans for many years to come.

There are several options for getting aid with student loan debt:

• Contact your loan servicer to discuss your possibilities for student debt relief.
• Enroll in an income-driven repayment plan.
• If you qualify, apply for forgiveness.
• Be aware of companies that advertise complete debt relief assistance; many are scammers.

Personal Loans

Personal loans can be utilized to consolidate credit card debt or to generate cash flow for a specific purpose, such as a house renovation. Loan durations typically range from two to five years, with interest rates ranging from 5% to 36%.

If you are experiencing difficulty repaying your personal loan:

• Call your lender to see if you may postpone payments or enter into a hardship plan.
• To better manage your finances, seek the free assistance of a nonprofit credit counselor.
• If you have too much debt, consult with a bankruptcy attorney.

Auto Financing

Car loans are a type of secured debt, which means that if you don’t pay, the lender can repossess the vehicle that acts as security. Car loans are becoming increasingly longer and more expensive. This can make them more difficult to pay off, especially if your budget is limited.

Here’s how to deal with a high-interest vehicle loan:

• Refinance the mortgage.
• Reduce the size of your car to save money.
• Find a way to get out of the loan.

Mortgages

Obtaining a mortgage is most likely the single most important personal finance choice you will make. They often have a lifespan of decades and cost hundreds of thousands of dollars. The average American has a mortgage balance of $190,595 in 2020. A mortgage is a secured loan, which means the bank can repossess your home if you don’t pay on time.

If you’re having difficulties paying your mortgage, you do have some options:

• Consider refinancing your home loan.
• Utilize the Home Affordable Refinance Program.

Commercial Debt

Debt is frequently required to keep a small firm functioning. You can get a loan or a business line of credit to recruit more people or buy new equipment.

However, too much debt might stymie your company’s financial flow and ultimately put it in jeopardy.

If your company is in serious debt, there are various options for getting out of it. They are as follows:

• Increasing your sales.
• Refinancing or consolidating high-interest commercial debt.

Good Debt vs. Bad Debt

Will that car loan or new credit card help you fulfill your financial objectives — or make them more difficult to achieve? The sort of debt you take on, as well as the amount and cost of that debt, might signify the difference between good debt and bad debt.

A credit card, for example, can be used to finance significant purchases while also earning reward points. Credit card debt with high-interest rates, on the other hand, can quickly spiral out of control if not carefully handled.

Here are some general principles for dealing with good and bad debt, as well as what to do if you have too much debt.

What Exactly is Good Debt?

Good debt helps you enhance your income or net worth and is typically low-interest. But, keep in mind, too much debt of any type can develop into bad debt.

Medical debt, for example, does not cleanly fit into the categories of “good” or “bad” debt. It’s an uncontrollable expense that frequently lacks an interest rate. You have several options for paying off medical debts.

Education

Student loans, which are typically seen as an investment in your future, typically have lower interest rates, particularly if they are federal student loans.

In general, keep your student loan payments under 10% of your estimated after-tax monthly income a year after graduation. The loan limit for someone earning $50,000 per year is $29,000.

Take the following steps: Look into repayment options such as refinancing and income-driven repayment programs to help you manage your student loans.

Mortgages

A mortgage is the path to homeownership and is perhaps the most important financial choice you’ll make.

Before you go house hunting, figure out how much you can afford and keep your mortgage payment to 36% of your salary.

Downsizing, refinancing, or moving to a lower-cost location can reduce housing expenditures.

Auto Loans

A car is a necessity for many people in their daily lives.

Keep overall auto costs, including your automobile loan payment, to no more than 20% of your take-home salary. Loan terms should be four years or less, with a 20% down payment preferred.

Take the following steps: You can reduce your car expenses by refinancing or trading in an unaffordable vehicle.

What is Bad Debt?

Expensive loans that harm your financial status are classified as bad debt. Debts with high or fluctuating interest rates are examples, particularly when utilized for discretionary spending or items that lose value.

Sometimes bad debts are simply good debts gone wrong. Credit card debt is an example of this. It’s no big deal if you have a high-interest credit card that you pay down to zero each month. However, if you accumulate high-interest credit card debt, you may be in trouble.

High-Interest Credit Cards

High-interest rates, such as those above 20%, can increase the cost of your borrowing.

If you’re not effectively chipping away at your credit card debt despite paying everything you can each month, it could be an indication that you’re dealing with potentially toxic credit card debt.

Take action: If you can restrict your spending, attempt the debt snowball strategy, which involves paying off your smaller obligations first. A balance transfer credit card can help you reduce your credit card debt, but you must have good credit to qualify. Otherwise, a nonprofit credit counseling agency’s debt management plan may be a viable option.

Personal Loans for Non-Essential Purposes

Taking out debt to cover purchases such as a vacation or new clothes can be a costly habit.

Personal loans can be a suitable alternative if you have a specific objective in mind, such as debt consolidation.

Take action: If you have a high-interest personal loan, you might be able to refinance it.

Payday Loans

Let’s be very clear, payday loans are a definitively bad debt that can quickly become toxic: they frequently have interest rates as high as 300%, making them unaffordable. These are short-term, low balance loans that should be repaid with on your next payday.

Financial experts advise against payday loans since they can quickly lead to a debt cycle.

Take the following steps: Consider borrowing from a credit union or asking family members for assistance.