4 Forms of Debt You Must Avoid At All Costs


There are times when you need extra money and one of the ways to get it is to borrow it. Borrowing can come in the form of loans from the bank, friends or even purchasing things on credit. Borrowing money may help you meet your immediate financial needs, but it can be hurtful to your financial life at the end of the day. And, as you may or may not know, not all forms of debt have the same effect on your financial life. However, if you want to achieve financial success in your life then you must become aware of the most harmful debts and I’ve listed them out for you below!

Debt #1: Credit Card Debt

Let’s face it, you know credit cards would be on this list. Having a credit card makes it easy for you to buy the things you want even if you don’t have the money for them in the moment. Sadly, paying with a credit card has become so easy that most people do not know when they’ve spent more than they can afford to. In short, credit cards are convenient to use but if you are not careful, you may end up in serious debt.

Credit card debts usually come with high-interest rates that can be as high as 27% which is why they can be so debilitating to your financial position. These high interest rates means that if you have credit card debt of $1,000 and you fail to pay on time, you might end up paying up to $270 extra in interest. This amount can be greater as the interest will compound over time.

If you want to avoid credit card debts, you have to look out for some of the common causes of credit card debts and eliminate them. One of the first reasons why people have credit card debt is because they do not have a budget. Some people think a budget is not necessary or it is a complete waste of time. However, a budget is an important tool that you must use if you want to avoid debt.

Having a budget makes it easy for you to find out if you are spending too much money on a particular spending category every month. And it also helps you to effectively plan your spending at the beginning of every month and allocate a specific amount for different needs and thereby reduce unnecessary spending. For example, buying a cup of coffee every day makes you spend about $30 to $150 every month. The price for a cup of coffee is about $1 to $5. However, if you decide to make your coffee at home, it will cost you about 16 to 18 cents per cup. That is just about $6 every month. If you compare the price of making your coffee and buying outside, you will realize that you can save a lot of money making your coffee. Having a budget is one of the things that will help you think like this and eliminate unnecessary spending.

Another way to avoid credit card debt is to avoid impulsive buying. You can easily fall into the trap of buying many things that you do not need using a credit card because you are not holding cash. You may not feel like you are spending too much money because you are paying with your card. Eliminate this by buying things with a list. And if possible, do away with your credit card. Spend your money and buy only the things that you can afford. Sometimes it may mean shopping for items that are cheaper like buying a similar product from a lesser brand.

Finally, if you want to eliminate credit card debt you must do everything you can to pay back your balance on time. When you delay paying your credit card debts, the amount that you owe increases because of the accumulation of interest.


Debt #2: Payday Loan Debt

Another form of debt you must avoid at all costs are payday loans. A lot of financial institutions that offer payday loan will tell you good things about this form of debt to try and entice you into taking them on but they are only telling one side of the story. A payday loan is one of the loans with the highest interest rate due to its short repayment period.

In effect, a payday loan is a short-term emergency loan that is usually due back in less than a month from when you take it out and almost always is accompanied by a high interest rate. When it comes to borrowing, payday loans can offer you a loan that is as much as 50% of your expected salary and most people take a payday loan because they have an emergency that cannot wait till when they collect their salary. These loans are usually deducted immediately from your next salary together with the interest.

One of the reasons why many people like the payday loan is because of convenience. When you apply for the loan and your application is approved, you can be paid within minutes. This makes it sound like a fair deal for people who need emergency funds but it isn’t. The interest rate on this type of loan is high and may have more disadvantages than benefits. For example, you may be charged as high as $20 for every $100 you get as a payday loan. Remember that you are expected to repay this high-interest rate in a short period like two weeks. The interest continues to increase and accumulate for some people who fail to pay back within the given period.

Another disadvantage of this loan is that it can make you financially unstable. People who take payday loans have to keep doing it to continue to meet up with their financial needs. Imagine taking out half of your salary before the payday as a loan, that means you will have a little amount to spend. You may be forced to apply for another loan and it keeps you in an endless cycle of debt.

A payday loan may be easy to obtain but they may not be the best solution for you and that is why you must avoid them at all costs. You are much better off asking a friend or family member to spot you some cash in the short term or even opening a line of credit as these will come with lower or zero interest and will save you from risking falling into the payday loan debt spiral.


Debt #3: Auto Loan Debt

Another form of debt that many people battle is auto loan debt. Auto loan debt can easily drive you into debt with a high-interest payment. However, I am going to share with you some ways to avoid this type of debt right now.

Before you buy a car, you need to make a careful plan. Don’t buy a car until you are sure you have a plan to pay it back. If you do not have any plan in place, create one immediately, or consider passing on paying for your car on credit. Now, I know it feels good to get into your car and be welcomed by that new car smell especially if it is your dream car. But you must not enter into debt because you want to buy a new car. You should also consider buying a car that you can afford or a used car if you want to avoid getting into debt altogether. Used cars are cheaper and they will still serve the same purpose as a new car. The basic function of a car is to move you from one place to another and even a used car will perform that function.

Another reason why people take a loan to buy cars that they cannot afford is that they do not have a budget for it. Just like you have a budget for your groceries and other items, you also need to have a budget for your car. Know how much you are willing to pay for a car before you take a car loan. You can easily research online to understand how car costs equate to monthly payments. And when you get to the dealer, don’t forget to bargain before making the purchase. The dealer wants to charge you as much as possible to make more profit and increase their own commissions. If you bargain well, you may be able to get them to reduce about $500 to $1,000 from the price.

Also, do not prolong your debt repayment. Try to pay off any auto loans you have as soon as possible. Taking a longer time to pay may allow you to pay a smaller amount each time but if you pay your loan in the shortest possible time, you will pay a lesser amount as interest. Putting more cash down when making the down payment will also reduce the time it will take you to pay back as well as the amount of interest you will pay.

Before you get yourself into an auto loan debt, you have to understand that the actual cost of a car is not just the amount that you spend on buying it. There are some daily costs such as fueling, maintenance, and repairs. Most people do not put this into consideration so after buying their car, they still need to spend a lot of money on it and then find it difficult to pay back their loan.


Debt #4: Student Debt

Student debt is another form of debt that you must avoid at all costs. The majority of graduates come out of school with debt and some do not have a solid plan of paying it back. Coming out of college with debt is not a good thing especially when you have a degree that offers little job prospects. Paying back the debt in this case becomes all the more difficult and the best thing to do is to avoid it.

When you come out of college with debts, it can affect you financially in many ways. It can hinder your ability to save for future purchases like a house or a car or even start investing for retirement. Moreover, having thousands of dollars worth of debt can be mentally draining as it hangs over you like a dark cloud. Luckily, there are ways to reduce or avoid student debt altogether which I want to get into now.

The first way to avoid student debt is to have a plan before you ever step foot in college. You can get a job during high school and start saving some of the money for school. This can greatly reduce the burden of the cost when you finally secure your admission. Another thing you should do is to consider schools that are not too expensive. Private universities are usually expensive so you can consider a state university that offers the same degree that you want to study.

Another thing you can do to reduce the cost of schooling and avoid debt is to cut your living expenses as a student. You have to endure the hardship now if you want to avoid debt. If it is possible for you to go to school while living at home then do it. It will save you money and get you light years ahead when you graduate. However, if that option is not available, you can also consider getting a roommate. You and your roommate could split the rent and you will pay less than when you are renting the apartment alone.

In short, if you want to achieve financial success, you must learn to avoid these critical forms of debt at all costs.