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Some of the Personal Finance content I will be writing about in this series of articles may be obvious or rudimentary to many of my readers but it also may be of great value to young people you may know. Please share this information with those you believe will best benefit from it.
As an adult, you have to deal with all types of Debt. It’s critical, therefore, to understand these types of Debt.
The Most Common Types of Debt:
- Mortgages
- Home Equity Lines of Credit
- Reverse Mortgages
- Student Loan Debt
- Auto Loans
- Auto Leases
- Credit Card Debt
I covered Mortgages, Home Equity Lines of Credit and Reverse Mortgages in this article: 17 Personal Finance Concepts – #5 Home Ownership
Student Loans
There are four types of Student Loans:
- Federal Subsidized Student Loans – With subsidized student loans, the student is not responsible for the interest on the student loans that accrue while the student is attending school full-time and for six months after receiving their college degree. The six-month Grace Period allows the student to defer making any student loan payments for six months after graduating college. The student is not responsible for any interest that accrues during the Grace Period. The Subsidized Student Loan is a “Needs-Based” loan, meaning you must qualify, based upon your income or the income of your parents. The U.S. Dept. of Education pays the interest until the Grace Period expires. Federal Subsidized Student Loans have a cap on how much you are able to borrow each year. For Dependents, that cap = $5,500 to $7,500 per year. For Independent Students, that cap = $9,500 to $12,500 per year.
- Federal Unsubsidized Student Loans – With unsubsidized loans, the student is responsible for the interest from the time the loan is disbursed to the student, until it’s paid in full. The student can choose to pay the interest or allow it to accrue and be added to the principal amount of the student loan, while attending college.
- PLUS Loans – Parents apply for Undergraduate PLUS Loans for their children and are on the hook for those loans.
- Federal Consolidation Loans – Allows students to consolidate all of their various Federal Student Loans into one loan. PLUS Loans are ineligible for the Federal Consolidation Loan Program.
To minimize the burden of Student Loan debt on their children, Parents often fund college tuition, room and board through a Home Equity Line of Credit, using their home’s equity as security for the loan.
Auto Loans
When most purchase a car, they do so by obtaining an Auto Loan. The terms for these loans is typically five years. The interest rates vary, depending upon your credit score. Those with high credit scores (FICO Score above 700) are able to obtain lower rates. Those with sub-prime credit scores (FICO Score of 630 or below) are stuck with very high interest rates.
Car Dealers have a Finance and Insurance Department that handles all of the paperwork for the loans it offers. Alternatively, an individual can obtain an Auto Loan from a bank that is not affiliated with the Car Dealer.
Auto Leases
The most common term for a Auto Lease is three years. During the lease term, the driver will be obligated for the lease payments, until the lease ends. After the lease term, the driver must either turn the leased vehicle over to the car dealer or purchase the leased vehicle, which will have a residual fair market value specified by the lease agreement you signed at the onset of the lease.
Credit Card Debt
Credit Card debt is perhaps the worst type of debt one can have, primarily because the interest rates are very high. The interest rate really only matters if the credit card spend during the monthly billing cycle is not paid off in its entirety. Carrying a balance on a credit card is known as Revolving Debt. Interest is charged on that Revolving Debt and can actually increase the balance owed on the credit card each month. If you cannot afford to pay off the credit card balance each month, this is because you are living beyond your means. This is okay, if temporary – such as using credit cards to purchase a refrigerator that you intend to pay off within one year.
But, if you use your credit cards to fund your ordinary living expenses, then this debt will continue to grown and you will eventually lose control over this nefarious type of debt, forcing you into personal bankruptcy.
Tom Corley is an accountant, financial planner and author of “Rich Kids: How to Raise Our Children to Be Happy and Successful in Life”, Effort-Less Wealth, Change Your Habits Change Your Life, Rich Habits Poor Habits and “Rich Habits: The Daily Success Habits of Wealthy Individuals.”
