One of the greatest fiscal crises facing Americans is not the debt of the federal government, but rather the debt facing the average American. According to USA Today, the average American has credit card debt totaling $3,600, but that figure is averaged out across the whole of some 320 million people living in the US. Some 60% of US households actually have no credit card debt at all. For those households with credit card debt with carry-over balances, the average debt has risen 10% in the 3 years from 2013 to 2016 to a staggering $16,048.
From credit card debt and student loans, there are various types of debt that the average American could hold on their personal balance sheets.
Repaid by the borrower in regular installments, this type of debt is generally repaid by the borrower over the course of a set period of time with equal monthly installments setup. These payments include interest and a portion of the principal on the loan. Common examples of installment debt include loans to finance the purchase of cars or appliances.
On the plus side, borrowers gain the ability to purchase an expensive item without having to pay in full up front, with an interest rate that is typically lower than a credit card's interest rate. On the down side, as a borrower you still face higher interest rates on installment debt than you might find on other loan options. According to NerdWallet, the average US household has $28,948 in debt on car loans, with the US total consumer debt for auto loans around $1.31 trillion.
Revolving debt is an open line of credit with no predetermined amount, but only a limit on how much you can borrow. How much of that open line of credit you use during the time period is up to you. This type of debt is typically taken out in the form of a home equity line of credit to perform remodels on a home or make upgrades to the structure of a house. Most borrowers make charges on the account and pay them off. Some leave the credit line open and use more money from that account later on for more charges.
The pros of revolving debt include the ability to use however much money you need (up to an approval limit), without needing to know the exact figure ahead of time. Additionally, you can leave it open and charge more without having to apply for a new loan or line of credit. As for cons, revolving credit can weigh down heavily on your credit score, although home equity lines of credit are often treated differently by the credit bureaus.
Secured debt is money that is borrowed and guaranteed, or secured, by the borrower's funds or assets. Those funds/assets are held by the lender in an interest-bearing account. Various types of loans can be considered secured debt, such as a second mortgage or auto loan, because the house/vehicle is held as the asset for collateral in the transaction.
With secured debt, you often get a lower interest rate, enjoy longer repayment periods, and borrow large amounts of money because the debt is secured against an asset. On the down side, you could lose your property or vehicle if you fail to make your payments. You will also pay more interest in the long term and be prevented from consolidating your debt if need be.
Contrary to secured debt, unsecured debt is based upon your ability and promise to repay debt. You have not put up any property to secure that loan, so it is an effective IOU note for the money you have borrowed. Credit card debt and medical bills are prime examples of unsecured debt. With unsecured debt, the lender cannot take possession of your property or assets if you fail to pay, and your loans can be consolidated.
However, on the downside, the interest rate is usually much higher for unsecured debt than other types of debt. Lower interest rates advertised for unsecured debt are usually reserved only for those customers with an excellent credit score.
30-Day debt is credit that has been offered to you that must be paid back in full by the end of the month, or 30-day period. American Express is a major credit card company that actually offers 30-day credit lines to users. On the plus side, if you are making a small purchase in an effort to build up your credit, 30-day debt is a good option to take one. On the downside, you have a short time to pay off your purchase and could take a big hit to your credit score for failing to do so.
Before borrowing any money and taking on debt, take the time to educate yourself on the various types of debt, as well as their pros and cons. For more information, please contact Manhattan Ridge Advisors.