Types of Consumer Debt
Consumer debt is a common way in which individuals pay for aspects of their life. This includes personal loans, installment plans, credit cards, etc. Most types of consumer debt can be devastating to household income over time. Understanding the types of debt and their uses will aid individuals in making sound financial decisions.
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The Facts
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Consumer debt is borrowed money used to meet individual consumption rather than investments. The key words in this economic definition are "borrowed" and "consumption." Individuals who spend more than they earn from jobs will usually borrow the money in the form of credit cards or consumer loans. While easy to access, repayment of consumer debt can be difficult, time consuming, and expensive based on the assessed interest rate of the debt.
Types of Debt
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The most common form of consumer debt is accrued via credit card. Some banks will issue credit cards to just about anyone with an address and any credit rating, whether or not the person is really qualified for the responsibility of the debt. Terms and interest rates will vary by bank and credit card types; default provisions will also vary based on the issuing bank.
Credit cards can be dangerous because they are easy to use and often publicized as a solid option for consumption purposes. Credit card companies also push Internet sales, because many Websites offer easy payment options with use of a credit card.
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Auto Loans
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Automotive loans are another type of consumer debt. While these loans are often more difficult to obtain than credit card debt, they can be a source of serious money issues. Most car loans range in length from three to five years, with an interest rate of 5-10% for qualified buyers. Some interest rates climb to 20-23% for buyers will a poor credit history. Sellers may also push options or warranties on buyers, increasing the financed cost of the vehicle.
Mortgage Loans
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Mortgage loans usually serve as the largest, most expensive form of consumer debt. Mortgages usually have several requirements, again depending on the home and the buyer's financial history. Several options exist for mortgages, including fixed rate, adjustable rate, balloon, and interest-only. Most of these options are meant to increase the profits of the mortgage company, not the buyer. A careful review of the mortgage terms should be conducted by the buyer to ensure that no irregularities exist in the agreement.
Debt Counseling
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Debt counseling can greatly aid individuals with large amounts of consumer debt. The LSS Financial Counseling Service and National Foundation for Credit Counseling are two reputable sources for consumers looking for consumer debt information.
Another good way to learn about consumer debt is to review some financial experts' thoughts about consumer debt. Obtaining good financial education is easier than ever with the abundance of information on the Internet and radio talk shows. Conservative financial gurus like Dave Ramsey and Clark Howard provide good advice on managing personal finances.
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