I’m a college kid, and–like a lot of other college kids–I’m terrified of debt. The way that student loans are affecting college students and young professionals is really pretty scary, and I am really not looking forward to paying off my loans for years and years to come.
But, obviously, there are a lot of types of debt out there. And some of them are supposed to be “good” ideas, right? My parents want me to buy a house someday, because they say it’s the smart thing to do. I may need a loan to get a car. So I guess I’ll need to figure out which loans are good and bad. My question for the experts is this: how do I do that?
Loans are indeed everywhere in our world. There are student loans, car loans, personal loans, payday loans, and all sorts of other health and unhealthy types of loans. So how can you tell which ones are which? Let us help you out.
For starters, let’s go over the basics. Loans are money that you borrow and then pay back over time. Loans usually mean interest: you borrow a certain amount, and–as you slowly pay it back–you actually pay more than you originally borrowed. That’s how the practice of loaning is profitable for the folks actually loaning the money.
Some loans are what we call “secured loans.” A secured loan has “collateral”–something that the borrower says that the lender can take from them if the loan is not repaid. Take a car loan, for instance: if you finance a vehicle and then stop paying off your loan, the lender can repossess your car. Mortgages are complicated in many ways, but they’re essentially just a form of secured loan: in this case, the repossession is foreclosure. Generally speaking, secured loans have lower interest rates, because the lender is taking less of a risk (this is part of the dilemma we have with student loans–they’re very important loans that most of us agree should be affordable, but they are not secured loans, because you can’t repossess a college education!).
Generally speaking, the best kinds of debt have a few things in common. You’ll want to see low interest rates, which in many cases means you’ll be looking at a secured loan. You’ll also want to make sure that you’re taking out debt for a good reason: securing a valuable asset is the best example, and it’s exactly what you’ll get when you take out a mortgage, which will help you buy a house. Finally, take note of the sorts of loans the government will help you out with: mortgage and student loans, for instance, enjoy some legal perks that can help you on your taxes.
On the flip side, steer clear of debt that features high interest rates. Short-term debt is rarely a good idea, with payday loans being one dangerous example of predatory practices.
With those basics as guidelines, be sure to take a very careful look at the specific terms of the particular loan you’re considering. Use trusted platforms to make comparisons between known and reputable lenders. What is the loan to value ratio of your home loan? How long will you be paying off your car? These are important questions to think about.
So there you have it: there is “good debt” and “bad debt,” but they’re not quite as hard to tell apart as you might think. Be careful, and take out debt only when it can help you financially. Mortgages are a great example of debt that can be used to your advantage, and even car loans can be reasonable if they are taken out carefully and help you get a car that, for instance, will help you commute to work and further your career. Good luck with your financial future!
“If you think nobody cares if you’re alive, try missing a couple of car payments.” –Earl Wilson