How Does Consumer Debt Affect You?
While debt itself is a relatively simple thing to comprehend, there are several different types of debt that need to be taken into consideration. When you’re trying to maintain financial stability, it’s important to recognize and understand just what those different types of debt are and how they can affect you. Knowledge is power when it comes to your finances, the more you know and understand, the better you’ll be able to deal with any issues that might pop up, including consumer debt.
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What Is Consumer Debt?
Consumer debt arises when someone buys an excess of consumer goods with credit instead of cash. These goods can be anything that depreciates in value once it is bought, including but not limited to cars, clothes, food, appliances, and electronics. While an institution or company might be in debt because they’ve taken out a loan in order to get their business up and running, consumer debt is acquired simply by purchasing items with money that you don’t have. Be wary, having too much of this kind of debt on your plate can cause many financial problems. The more debt you take on, the harder it will be to pay it off in regular installments. If you aren’t able to make your payments, the debt will only grow, your credit will be affected negatively, and you may end up having to seek more drastic debt relief help.
On the upside, there are certain circumstances where having some consumer debt will won’t totally damage your financial standing. Let’s say you’ve managed to find yourself a job with a better income than the one you’re at currently. Taking on some consumer debt for a loan on a new car, so you can get to and from that job might actually benefit you in the long run.
What Are Secured and Unsecured Debts?
Remember, there are different types of debt and it’s important to know the difference between them in order to maintain a healthy financial lifestyle. For starters, we’ll talk about secured debts, versus unsecured debts.
The first thing to remember is that a secured debt will involve collateral, while an unsecured debt does not. Loans that you can get for a house or a car are examples of secured debts. In this case, if you fail to make your payments, your lender will have the legal right to take that property (i.e. the car or house) and use it to cover the remaining debt.
On the other end of the spectrum are unsecured debts, where nothing of value will necessarily be taken away from you if you fail to make your payments. However, just because you have nothing that can be seized doesn’t mean you’re in the clear. In fact, creditors and lenders can charge you fee and penalties, or even take you to court over an unpaid unsecured debt. With the lender is able to successfully sue you, it is possible that you could face your property being taken as payment. Keep in mind that this is an extreme case.
An example of unsecured debt comes from credit cards. If you’ve been failing to pay a large sum, then credit card companies will send a collection agent to pursue your debt. Actually, while a credit card normally qualifies as unsecured credit, there are credit card companies that will sell you “secured” cards. With one of these cards, you’ll make a down payment of any amount you wish and then have that amount in available credit to use. However, if you do not make your regular payments, whatever deposit you put on the card can be taken as collateral to manage the amount of debt you owe.
Installment Loan Debt VS. Revolving Debt
Strictly speaking, there are two ways that a debt can be paid off. When it comes to a mortgage or a car loan, you’ll have installment loan debt, meaning you’ll make a set amount of monthly payments until the debt has been paid off in full. The good thing about installment loan debts is that you’ll be aware of the exact amount you need to pay, all you need to do is make the payments on time.
Where a revolving debt differs from an installment loan debt is that in this case, you won’t have a set amount to pay each month. Instead, you’ll have a minimum payment, and likely be charged interest on the rest of what you owe. The balance you carry on your credit cards is considered revolving debt. As long as you pay the minimum amount on your monthly statements, you can continue to pack on debt. The problem with revolving debt is that if you don’t make your payments in full, the debt will likely only get larger in size because of the interest charges.
Where Are My Debts Coming From?
One of the most important things to understand is where your debts are coming from and how you got those debts in the first place. In other words, you must know who your bank, creditors or lenders are, and how much debt you have with them. True, there are various methods of paying off the debts you have, but we recommend that you deal with the debt that is costing you the most in interest fees first. Once you’ve done this, you can move down the line and start paying off your smaller debts.
This is where it pays to know exactly which companies, banks, creditors, and lenders you have debts with, as these organizations will vary in terms of the interest rates they offer. Some will definitely charge more than the others.
Types of Debts That Can’t Be Consolidated
For the most part, any unsecured debts you might have will qualify for debt consolidation. An example would be student loan debt, which can be taken care of with a particular type of consolidation loan. The debts that can’t be consolidated are things like payday loans and quick cash advancements. These qualify as unsecured revolving debts, and often cannot be consolidated because of the terms of their contracts.
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If You’re In Debt, You Are Not The Only One
According to recent studies, the average household debt ratio has risen by 11% in the last decade. As of 2016, many American households owe well over $90,000 in credit card debt, student loans, mortgages, auto loans, and other types of debts.
Debt is a real problem for many American. However, rest assured that if you are in debt, you are not alone, there are many ways that you can start paying down your debt so you finally live the debt-free life you deserve.
Check out our other article to see how to qualify for Debt Management.
What Can I Do Now?
Yes, having a lot of consumer debt on your plate can be difficult to deal with. It takes time, money, and effort to secure yourself the debt-free financial future you want. We can help. We have a variety of solutions, catered to your needs so that you can get back on track and work towards becoming debt-free.