Five Worst Types Of Debt

Submitted by: Chris Gagner

It s important in any financial plan for you to become debt free and stay away from debt. However, sometimes debt can be unavoidable. During times of layoff or hardship, cash can get tight. Also, purchases such as a house require many years to save up cash to buy right out. If it is necessary to acquire debt, there are certain banking products should be avoided if you want to be able to pay off your debt in a timely manner, and not put too much of your property at risk if you cannot repay the loan.

5. Home Equity Lines (HELs)

The issue with this first type of debt is the way that it has been marketed to be the best thing since sliced bread. The idea is that you can use the equity in your home to establish a low interest credit line to fund building projects, business ideas, emergency funds, or anything that you need. So what s the problem? The problem that I have with HELs is that you secure a non-house related loan with your home. If you run upon hard times and cannot repay the loan, you will lose your house.

A home is meant to be a place of protection and security. I don t want do anything that would increase the chances of losing it. HEL is an appropriate name, they just left off an L.

4. New Auto Loan

The actual loan in this case isn t the problem. You can generally get a good deal on the terms and interest rate. As long as you keep the payment within an affordable range and pay it off quickly, it shouldn t cause trouble.

The real issue that I have is with a new car. Anyone that says that a new car is an investment doesn t know very much about investments. A car is a piece of equipment, and it goes down in value. A new car s value drops like a rock and if you finance it for more than 36 months and don t put at least 20% down, you ll likely be upside-down for most of the period of the loan. You would be better off taking a higher interest rate and getting a slightly used car.

Often times, you can get a new car rate on cars that are up to 2-3 model years old. Take advantage of this and let someone else take the hit from depreciation.

3. Adjustable Rate Mortgage (ARM)

Coming in at number three is my least favorite mortgage. If you are looking for a loan that will give you ulcers and insomnia, this is the one for you. The mortgage company will give you a slightly lower rate up-front than what you could get from a fixed rate. However, if interest rates start to rise, they will adjust the rate upwards along with it. What this means for you is that your payment will go up and up and up. And what happens if it goes higher than you can afford? You ll be living in an apartment after they foreclose on your house and ruin your credit. Stay away from ARMs.

2. Credit Cards

BU005137 When credit cards first came out, everybody knew that it was dumb to have one. With interest rates averaging around 18%, you had to have never finished fourth grade math to think that it was a good idea to swipe one of these things.

Today, only a few decades later, the average person carries not one, but two credit cards. We get bombarded with offers everyday in the mail. Kids get attacked by banks selling credit cards on college campuses. And we have bought the message. According to a survey done on creditcards.com, the average household that has credit card debt has a balance of $15,788. That s nearly the same amount that someone working minimum wage would earn in an entire year!!!!!

If you hope to have any future financially, attack the credit card debt, get it out of your life, and get rid of the cards forever!

1. Payday Loans

If you were thinking that credit cards would be #1 on this list, you must have forgotten about those sharks out there that prey upon the poor. Credit cards look like an angel in shining armor compared to this sorry excuse for a loan.

If you don t know much about payday loans, here is a summary. You go in and get a loan for $200. You will write them a check postdated for, let s say, two weeks in advance. It will include a FEE of around $30 or so, therefore the check that you write them is $230. Basically, you will $30 interest to use $200 for two weeks. That would come out to approximately 390% APR. Actually that s a low estimate. The average APR for payday loans is 456%. Unbelieveable!

It s so bad that at least 11 states have already banned these establishments in their state. It should be more than 11! It s an absolute violation of usury laws in my opinion, but I believe the get by these laws by calling it a fee instead of interest. Payday loans are so bad that I would actually recommend that someone get a credit card in order to stop using payday loans!

If you want to be successful with money, it s very important to stay out of debt. But if you must go into debt, please consider this list. Each of these 5 types of debt are terrible products, and there are alternatives on the market for each. If you re ready to ditch these terrible products for better alternatives, check out 5 Worst Types of Debt Alternatives.

About the Author: With over five years experience working in the banking & finance field, Chris is the creator of

SmartPF.com

, a personal finance website dedicated to helping individuals and families struggling financially. He is certified by National Institute for Financial Education as a Certifed Credit Counselor.

Source:

isnare.com

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