Did you know that the average American has roughly $90,460 in debt? Despite the prevalence of debt, there is still a lot of confusion surrounding the topic. That’s why we decided to write this article.
In it, we’ll give you a crash course on this topic by answering questions like, What is debt? And what causes it?
If you’ve landed in debt recently, we’ll also go over some ways to start getting out of it. That way, you can start to take control of your financial future. Let’s get started!
What is Debt?
The official definition of debt is something that’s borrowed from someone else. However, when it comes to the debt that most people face on a daily basis, that something is money.
When people or businesses can’t afford to make the large purchases they need, they’ll borrow the money to do so.
They might do this through a loan or through a credit card. Regardless of the method, an arrangement is made between the borrower and the lender. The borrower will pay the amount back in full by a certain date.
In addition to this, they’ll typically also owe extra interest on the amount that they borrowed.
Different Types of Debt
Generally speaking, you can break down debt into four main categories: secured, unsecured, revolving, and mortgages. Secured debt refers to debt that’s covered by some form of collateral from the borrower.
Typically this collateral is property or vehicles, or a similar asset. In the event that the person can’t pay, the lender has a right to seize the collateral.
This is different from unsecured debt, which doesn’t require any collateral from the borrower. However, unsecured debt typically comes with higher interest rates and requires good credit to access.
If you want to learn more about these types of loans, you can check out the guide linked here. Next, there’s revolving debt. With this option, you’re given a borrowing limit from your lender.
You can borrow as much as you like as long as it doesn’t exceed the borrowing limit. Of course, you’ll need to pay it back at some point.
The most popular type of revolving debt is credit cards, but they can also include lines of credit. Lastly, there are mortgages. This is a type of secured debt that’s used to purchase a house.
Common Causes of Debt
There are a lot of different causes of debt. Most of the time, it’s just so a person can afford the car or house they’ve always wanted.
Unfortunately, it’s becoming increasingly common to see people drowning in debt. So, where is this debt from? In this section, we’ll be taking a look at some of the common causes that get people into debt.
If you recently lost a job or aren’t getting as many hours as you need, you might be hemorrhaging money. That means that your income isn’t enough to cover basic necessities like rent, bills, and food.
Because of this, people will often turn to personal loans and credit cards as temporary solutions.
Living Beyond Your Means
Some people might be used to a certain standard of living that uses up a lot of money. Then, certain circumstances (job loss, moving out of their parent’s house) cause them to be unable to afford it.
Unfortunately, many people simply can’t give up their lifestyle, whether it’s going to concerts, fancy restaurants, or whatever. This can cause them to get into significant debt with purchases they just can’t afford.
Divorce or Breakups
There are two reasons why divorces or breakups cause debt. First, in the case of a divorce, the court costs can be expensive. This is especially true if the divorce is contested by either party.
Second, there’s the debt that comes with the aftermath. Often couples split things like rent or mortgage payments.
So, you might not be able to afford things on your own. Or you owe things like alimony and child support that can put a drain on your finances.
Student debt is one of the most prevalent forms of debt in the country. College and higher education are expensive. As such, students and parents are often forced to take out large loans to pay for them.
Sadly, it’s often difficult for students to pay back these loans when they’re directly out of school. This causes large interest rates that can keep them in a cycle of debt.
How Do You Get Out of Debt?
If you want to get on top of your debt payments, the first thing you should do is make a budget. Calculate how much money you have coming in and what you’re spending it on.
If you aren’t happy with the amount of money you’re making, look for a new job or a second one. Make sure to cut out any unnecessary expenses. Next, prioritize certain types of debt.
Things like your mortgage are more important than credit card bills because you could lose your house if you don’t pay for them. Then, begin to pay off debt through debt consolidation.
Or, if there’s no logical way you could ever pay off the debts, consider bankruptcy. Just keep in mind that this is a long and expensive process.
Appreciate Learning About Debt? Keep Exploring
We hope this guide helped you answer the question, What is debt? If you’re deep in debt, there’s no denying that it can be stressful. That being said, it’s important to remember that not all debt is bad.
Some debts, like mortgages, are typically a necessary step toward becoming a homeowner. So, make sure you balance the good debt and the bad debt in your life.
Appreciate learning about this important financial topic. If the answer is yes, you should keep reading to find more topics that you’re sure to enjoy.