It’s easy to get in over your head with debt. Enticing credit card offers show up in the mailbox and let you spend money until you hit your credit limit. After maxing out your credit card, you open another and max that one out, too. One day, after making payments on your credit cards for years and making little progress, you may decide to swear off debt for good so you never rack up loans again.
However, not all loans are bad debt. There are a few types of debt that can be good for you if you use them responsibly. Swearing off these types of good debt may hinder your financial future.
Mortgage Loan
Mortgage debt is often referred to as good debt because it allows you to buy a house. Houses, unlike many other items you can take out loans for, are not usually depreciating assets. Instead, houses usually appreciate, or increase in value, over time. Over that same time period, you’ll be paying down your mortgage. The combined effect of increasing home values and decreasing mortgage loans can offer a great boost to your net worth. You have to be careful, though.
Like other types of debt, you can quickly get in over your head with a mortgage. It’s easy to start house shopping with a reasonable budget. You go with a real estate agent and look at the homes in your budget and realize they don’t hit every item on your wish list. Then, your real estate agent mentions that for just $20,000 more, you can get exactly what you want.
Even though adding $20,000 to your house budget would be a financial stretch, many people do so anyway. They bank on future raises or cutting back on other expenses. Sadly, many of those future raises never happen. Even worse, some people get laid off. As far as cutting expenses goes, it usually works in the short term. Eventually, most people return to their old spending ways and incur additional loans to make up for the difference.
Even if you can afford to take out a mortgage, buying a home isn’t always the best idea. In many areas of the country, it’s actually more expensive to buy a home than to rent. If you live in one of these areas, buying a house may make you feel more at home but it may not be the best choice for your finances.
Student Loan
Student loan debt has a been covered negatively in the news lately. Luckily, not all student loans are bad. If used correctly, student loan debt can open many doors and help you increase your income. Used incorrectly, you could end up with tens or hundreds of thousands of dollars of student loans with a useless degree or no degree at all.
Student loans enable those not able to pay cash for a college education a chance at increasing their income. The trade off is you’ll have to pay them back, plus interest in most cases, when you graduate. The key to making sure you take out a responsible amount of student loans is by making a plan.
Know what type of degree you’ll obtain, what type of job you can get with that degree and how much the average job in that field pays straight out of school. With this information, you can calculate how much you can afford to take out to obtain the degree without getting in over your head. Very few prospective college students take the previously mentioned exercise seriously. If they did, we might not have a student loan crisis.
Business Loan
Incurring debt to further your business could be a great way to use debt. It can also be disastrous. Many companies have used loans to accelerate their growth to become behemoths. Others have used debt to try to further their business only to end up in bankruptcy. The difference between successful business debt and unsuccessful business debt is a solid, realistic plan that has been well thought out in advance.
For instance, many landlords use loans to finance additional rental properties. However, before taking out debt to purchase a new rental property, they run a detailed analysis to see if the deal will provide enough cash flow to be successful. Smart landlords will use both realistic and worst case scenarios when running the numbers to make sure they can pay the debt even during bad times. If the numbers work out, they use business debt to buy a property. If not, they pass.
Not all loans are created equal. Debt is not always bad. Use them responsibly when it can benefit your financial situation. You might find yourself in a much better position than if you simply called all loans bad debt like many others do.
What Are the Different Types of Installment Loans?
Installment loans enable you to pay for any big investment through regular long-term payments. As the borrower, you repay for a set amount of money each month until you pay back the entire loan. This quality of installment loans makes it a great choice for many borrowers as applying for one means that becoming overwhelmed with big payments is never an issue.
In this guide, you’ll learn about the different types of installment loans depending on your financial situation. Read on and learn whether what payments you need can get covered by installment loans.
1. Mortgage
Mortgages are one of the most common types of installment loans around. These are what you apply for if you’re thinking about getting your own house. For the most part, you’ll get a large sum of money, enough to buy the house you want.
You don’t need to worry about repaying the loan you took in this case. Depending on how much you borrowed, you’re given ample time to pay it back. This can range from 15 years up to 30.
In the end, you’ll end up paying more than what you’ve borrowed but that’s expected for mortgages. Make sure to pay the required amount each month. If you fail to do so, the bank may take possession of your house.
How to Ensure Mortgage Approval
Often, people find they get rejected for a mortgage even if they pass the interview. This happens because of one simple mistake they commit. Often, it’s because they spend a large amount of money right after the interview.
After getting approved for a mortgage, the lending company tends to monitor your financial records to ensure they’re lending to someone responsible with their finances. Most people don’t know this and end up with big expenses afterward.
It may look like a harmless decision, but it may be what decides whether you get the loan in the end. Until they give you the loan, it’s best to remain stingy.
2. Signature Loans
Signature loans are a kind of personal installment loan which business owners can make use of the most. They get their name from the fact that most of these only need your signature to get approved. This is a good way to come up with quick cash to help your business stay afloat.
For the most part, how much you can borrow stems from how much your business makes per year. In some cases, lenders do a soft check by checking your credit history before approving the loan.
Why You Should Apply for Signature Loans
As mentioned above, a signature loan only requires your signature for the most part. This makes it a great option if you have a bad credit score or history. Checking the credit history is often only a formality on the lender’s part.
This makes the process of getting money through a signature loan a fast one. If you’re in something of a rush, this is something you may want to consider.
These loans also tend to get done with a one-off account. This makes it so you won’t need to worry about any residual fees from the previous loan.
3. Car Loans
Sometimes referred to as auto loans, this kind of installment loan is self-explanatory. Using these loans is a great way to pay for a car you want to buy. With car loans, you won’t need to worry about a big expense which may leave you bankrupt.
Often, these loans are on a set rate as appointed by the company setting them. This means you can’t afford to pay for less than what they tell you lest they take your car away from you. It’s wise to check out different offers from different lenders to get the best deal possible.
Benefits of Applying for Car Loans
Thinking of whether or not applying for a car loan is worth it? Well, you should know there are different benefits to doing so.
For example, you’ll be able to get your car sooner rather than later. This can then enable different avenues like being able to land a job far away from your place of living.
Even if the pay of the job you land isn’t that great, you still won’t need to worry about losing your car as car loans have the lowest interest rate of any installment loan around. Depending on the model, you can go as low as a 2% interest rate for your car payments.
4. Student Loans
If you’ve had financial troubles while entering college, then you may have applied for a student loan. Student loans are among the types of installment which only last for a fixed period. Often, they last only 5 years at most.
Most student loans last as long as you do in school though. As long as you’re enrolled in school, you receive a set amount of money to help you pay for your expenses. You can start paying back the loan at this point if you choose to do so.
Once you graduate though, you’re expected to pay a larger amount each month. It’s often a better idea to start payments as early as you can. Doing so can make it easier for you to pay the loans back later on.
What You Need to Know About Student Loans
People often complain about student loans. For the most part, the complaints are because they find the required payments too large for each month that passes. Sometimes, it’s because the interest rates are unreasonable for them.
Often, this is because the loans they opt for are scams in some form or another. Avoiding these student loan scams will allow you to be able to fulfill your loan sooner than later.
How to Avoid the Debt Consolidation Loan Trap When Paying off Debt
The feeling of being in debt is often awful and completely overwhelming. Whether you ended up in debt due to spending more than you earn or you ended up in debt due to a nasty accident, most people want to be debt free. They just don’t know how to get there.
Everyone hopes there is an easy way out of debt. Unfortunately, there isn’t. Getting out of debt requires hard work. You must spend less than you earn and put the difference toward paying down your debt until eventually you pay your debt off in full. Even though paying off debt isn’t easy, it doesn’t stop people from trying to offer “easy” solutions.
The Debt Consolidation Loan Trap
One of the more common get out of debt traps are debt consolidation loans. While these loans themselves aren’t traps, they don’t always work. Sometimes these loans are unsecured personal loans that come with lower interest rates than credit cards, but still higher interest rates that secured debt. Other times you’ll be convinced to take out a home equity loan or line of credit that comes with a relatively low interest rate but is secured by your home.
Regardless of the form your debt consolidation loan takes, you might have heard you’ll pay off your debt faster if you consolidate your debt to a loan with a lower interest rate. This statement can be true depending on your individual circumstances, but only if you suddenly change your money habits from accumulating debt on a regular basis to being a money master. That doesn’t always happen.
The Unfortunate Truth
People generally have good intentions when they consolidate their debt at a lower interest rate. They work hard to pay off their new debt consolidation loan for a few months. They start making progress. Then, one of a handful of things might happen that causes a major setback.
They Get Frustrated with Progress
No matter how dedicated you are to paying off your debt, it’s easy to get frustrated with slow progress. This is especially true if you have a large amount of debt. In the beginning, more of your payments will go toward interest than at any other point during your loan repayment. Sadly, that means the amount owed on your debt will be declining at the slowest rate in the beginning, assuming you make the same payment every month.
At some point, you’ll usually wonder if being debt free is really worth the sacrifice. You’ll find yourself spending money on a one time treat that you probably shouldn’t buy. Then, that one time treat turns into a regular thing and you’ll be racking up debt before you know it. This is one way the debt consolidation loan trap gets you. Once you start incurring debt again, you’re in trouble.
My wife and I faced this challenge during our massive debt pay off. My wife had over $80,000 of student loan debt when she graduated from college. We were dedicated to repaying the debt, but the high minimum payments were depressing. Then, when we realized most of those payments went toward interest, we were even more depressed. Thankfully, we decided to pay extra toward the loans which ended up reducing the amount paid toward interest much faster than if we stuck to the original loan schedule. Being debt free is totally worth the frustration.
An Unexpected Expense Pops Up
Unexpected expenses can derail any debt pay off plan. The problem is what happens after the unexpected expense pops up. Many people put all of their money toward debt pay off, so they don’t have anything left in reserves when the unexpected expense hits. One common solution is taking out the credit card to pay for the expense.
While using a credit card to pay for an unexpected expense isn’t the end of the world, it can bring up other issues, too. Now that you’re paying a debt consolidation loan and a credit card bill, what’s adding a few more purchases to that credit card bill? It is a slippery slope that can lead you to even more debt than when you started.
Income Unexpectedly Drops
In an ideal world, everyone would be fully employed. The world we live in is far from ideal. Recessions pop up every few years and those recessions often bring layoffs. If you survive layoffs, you could lose your job for other reasons. Regardless, a drop in income is a real possibility you could face while paying off debt.
When you’re paying off a debt consolidation loan, you probably don’t have three months of expenses in the bank. The money to keep living has to come from somewhere, though. Often that means turning to credit cards and destroying your previous progress.
You Simply Drift Back to Your Old Spending Habits
Falling off the debt pay off train doesn’t always happen because of a negative financial event. Many times people simply drift back to their old spending habits over time. It’s hard to break bad habits.
Spending more than you earn is definitely one of those habits that is hard to break. Sometimes it takes hitting true rock bottom before you can change your spending ways and successfully use a debt consolidation loan.
How to Prevent the Debt Consolidation Loan Traps
Using a debt consolidation loan to get rid of your debt can be a very positive experience, as long as you’re committed to the process. If you want to have the best chance of succeeding in your debt pay off goal, you may want to consider doing some of the following in addition to using a debt consolidation loan.
Have a Small Emergency Fund
Of course, having cash sitting in the bank will cost you a bit of interest on the debt you owe. That cost could easily more than pay for itself. Would you rather lose a tiny bit of interest leaving $1,000 or one month’s worth of expenses in the bank or risk taking on even more debt and falling off the debt pay off wagon when you hit a bump on your journey?
The size of your small emergency fund is up to you. It could be as small as $500 or as much as a couple months’ worth of expenses. Think about what financial roadblocks could cause you to stop your debt pay off and save enough to cover those issues. You won’t be able to cover everything, but covering most of the potential issues is better than none.
Make Your Debt Pay Off Public
Any time I make a goal public, I’m much more likely to accomplish that goal. Announcing your debt pay off goal can work wonders toward holding you accountable to paying off your debt. Even if you don’t want to announce your goal publicly, pick a couple family members or close friends you can count on and tell them. Hopefully, they’ll check in to see if you’re still on track to reach your goal and help you work through any problems you face along the way.
Set Up Rewards Along the Way
Rewards can be powerful motivators. You should use them in your journey to pay off your debt consolidation loan. Come up with goals like not charging money on your credit card each month or paying off $500 toward your loan balance each month. When you achieve one of these goals, reward yourself.
Of course, spending money would be a counterproductive reward, so choose something that doesn’t involve spending. Consider taking a walk down your favorite trail or spend a few hours hanging out at your favorite park. Sometimes having a goal with a reward attached is all you need.
Have a Post Debt Plan
Just paying off debt can be the reward for some people. For others, they need a goal bigger than just paying off debt. What do you want to do after you pay off your debt consolidation loan in full? Save up and go on a vacation? Save up and buy a boat?
The post debt plan is up to you, but having one may just be the motivation you need to stay on track. Just remember, any post debt pay off goal should not involve getting into more debt with a car, boat, RV or any other type of loan.
Remind Yourself Daily
You can write your goal on your bathroom mirror so you see it each day when you wake up. Another option could be setting up your wallpaper on your computer to remind you of your goal. You could do the same thing with your cell phone. Whatever you choose, make sure you’ll see the goal early during every day so you can remember to work to make progress toward your goal throughout the day. This could help you make smarter money decisions to put more money toward your debt.
Debt consolidation loans can be great tools to help you pay off your debt faster. Figure out ways to avoid the common gremlins that can throw off your plan and set up systems to help you accomplish your goal. If you can do those things, you should be well on your way to a debt free life.