There are many debts you should avoid whenever you are trying avoid financial ruin. Some of the debts that you can obtain may hinder your financial independence in the future. There are four different types of debts you should avoid whenever possible.
Cars are needed for everyday life and are not something that many people can live without. However, auto loans are one of the debts you should avoid. Many times people will go overboard when it comes to purchasing a car.
Borrowing money to purchase a car is not wrong; you want to pay the loan off as quickly as possible. The longer you let the loan continue the more interest you will be paying. Save up some money before going and taking out the loan, so that you can make a large payment shortly after taking out the loan.
It is not smart to lease a car all the time. It is something that you want to think about clearly. When you lease a car you not only pay high interest but you also have nothing permanent to show when you have finished your contract.
Another reason that auto loans are a debt you should avoid is because most people cannot stop at just one. Many times after you complete one loan, you want a better car and end up taking out another.
Commonly payday loans are used to cover unexpected expenses until the next day that you are paid. Payment for this type of loan is due at the time of your next paycheck. That means that this type of a loan is only good for about two weeks.
This is a debt you should avoid because it comes with consequences. With a payday loan, it has a high interest rate, anywhere from 15% to 30% for only a two-week period of time. That may not seem like a lot, however that is because you are looking at the short-term numbers. If you analyze the numbers for the APR (annual percentage rate) then you will see that it is from the interest rate is actually from 390% to 780%.
In most 401k plans, there are options for a loan provision. This loan is a debt you should avoid in getting into. 401k loans are something that most people believe comes with no penalty; however, there are several consequences.
- If you leave your job, you will be required to pay the loan in full. Most commonly, you will have only 60 days to repay the money.
- If the loan turns into a withdrawal it can be taxed at your normal income tax rates.
- There will be a 10% penalty charged on top of any taxes if you are under the age of 59.5 years old.
- You will miss any additional interest, capital gains, or dividends while the money is on loan. That means that your money is no longer in an investment account working for you.
Borrowing from your 401k can become a habit. It can become so easy to justify borrowing from your 401k that this is one debt you should avoid completely.
There are so many reasons that credit cards are a debt you should avoid. Most of the debt that an individual will abuse through purchases and the assumption of the ability to pay it back. Credit card debt can be debilitating to a person’s credit score as well as their financial stability.
It has been proven that there are around 46% of families have credit card balances. The average credit card balance is around $7,300. This can be a lot of debt for most families, and it can cause a lot of financial situations.
It can be tempting the credit rewards that can be offered, and this can make individuals want to gain more credit. When looking at rewards you want to watch out for penalties on late payments. Extra costs from the credit company can counter balance any good that is gained from the rewards.
It is important that no matter what debt you will choose, be sure that know what you are getting into. Make sure that the terms to any agreement are clear to you, as well as any consequences that might be incurred. These are the four types of debt you should avoid. However, that does not mean that in moderation or with careful planning that, you cannot successfully own a car, or credit cards, or even get a payday loans. However, it is important that no matter what you decide that you continue to watch and evaluate your situation to reduce the debt you are in.
Remember that it is important to continue to save for items that you need, this will help you stay out of the habit of search for the debt you should avoid.