Personal Debt

Personal Debt
Personal Debt (which is sometimes referred to “Consumer Debt”) is any financial obligation that is owed by an individual or a household, as opposed to by a business or government.

What is Personal Debt?

Also known as consumer debt, personal debt is the result of purchasing goods that are consumable and/or don’t appreciate. High amounts of personal debt can increase the strain on your current income by making it more difficult maintain to maintain regular payment of your debts and bills. If your personal debt is not properly managed, it can lead to bankruptcy.1

Personal debt can also extend to your spouse. If you and your spouse take out an auto loan together to purchase a car, this would be considered a personal debt. A personal debt can also be secured or unsecured. Secured debt is debt acquired by putting up some form of collateral while unsecured debt relies on your promise to pay.

What are the types of Personal Debt?

Some of the most common types of personal debt include:

  • Payday Loans – This is most controversial, type of personal debt today. Payday loans are extended to cash-strapped working individuals, and instead of helping with their debt, it only adds to it. You can learn more about the disastrous effect of payday loans here.
  • Credit Cards – This type of personal debt is considered unsecured because there is no collateral associated with it. Credit card debt can cause you to go into default if you do not pay at least your minimum monthly payment.
  • Mortgages – A mortgage is a loan for the expressed purpose of buying a house. When you take out a mortgage, the house is the collateral used to secure the loan.
  • Student Loans – Paying for college is a major expense. In fact, the US Department of Education says total outstanding federal student loans is $556 billion. However, this can be a “good debt” because it helps enhance your future.2
  • Auto Loans – When you take out a loan to purchase a vehicle, you are adding to your personal debt.
  • Home Equity Loans – Many people use home equity loans to borrow against the equity of their home to provide money for a major purchase. However, a home equity loan can put you at risk for losing your home if you can’t pay them back.
  • Small Business Loans – While this is a type of business loan, the borrower is typically an individual or small number of individuals who become responsible for the debt if the company enters bankruptcy.

What are the benefits of Personal Debt?

Not all debt is bad—if you can properly manage your personal debt, it might benefit you in the long run.

A certain amount of personal debt is necessary to afford any kind of large purchase, such as a mortgage or student loan. This is because not many people can pay for a car, house or college education with the money they have in their checking account.

By properly managing your debt through monthly payments, you can improve your credit score, which can lead to lower rates on future loans—so pay on time.

What are the consequences of Personal Debt?

Depending on how much debt you have, and what kind, personal debt can have major consequences on your life and finances.

Too much personal debt can mean you owe far more on your payments than you are able to afford. One of the most common ways people take on too much personal debt is through credit cards. With the accessibility of a credit card, many people tend to spend more than they can pay back. And, if you take on too much debt, you might have to file for bankruptcy to get these debts partially or fully forgiven. As a result, too much debt can have a negative effect on your credit score, which can lead to higher interest rates on future loans.

Personal debt isn’t always bad, but it is important to make your payments on time. Keep an eye on your finances to ensure you won’t fall into more debt than you can afford to pay off.

References:

1 “Consumer Debt” Investopedia. Accessed March 22, 2017. http://www.investopedia.com/terms/c/consumer-debt.asp

2 “America’s Biggest Types of Personal Debt” CNBC. Accessed March 22, 2017. http://www.cnbc.com/2009/04/27/Americas-Biggest-Types-of-Personal-Debt.html?slide=7