What is personal debt?

What is Personal Debt?

Personal debt also known as Consumer debt is the amount owed by consumers (as opposed to amounts owed by businesses or governments). It includes debts incurred on the purchase of goods that are consumable and/or do not appreciate. In other words, it is a debt which is used to fund consumption rather than investment. Personal debts can be secured as well as unsecured.

Types of Personal Debt:

• Payday Loans: Payday loans also known as payday advances are short-term unsecured loans with high-interest rate typically two-week loans meant to be repaid on your next payday. 
• Credit Cards: Credit card debt is the type of personal debt that is considered unsecured because there is no collateral associated with it. Credit card debt can cause you to go into default if you do not pay at least your minimum monthly payment.
• Mortgages: A mortgage is a loan for the expressed purpose of buying a house. When you take out a mortgage, the house is the collateral used to secure the loan.
• Student Loans: Student loans are personal debt that is considered “good debt” because it helps enhance your future. 
• Auto Loans: When you take out a loan to purchase a vehicle, you are adding to your debt.
• Home Equity Loans: Many people use home equity loans to borrow against the equity of their home to provide money for a major purchase. However, a home equity loan can put you at risk of losing your home if you can’t pay them back.
• Small Business Loans: While this is a type of business loan, the borrower is typically an individual or a small number of individuals who become responsible for the debt if the company enters bankruptcy.

What are the benefits of Personal Debt?

If you can properly manage your personal debt then not all debt is bad it might benefit you in the long run. A certain amount of personal debt is necessary to afford any kind of large purchase, such as a mortgage, student loan, and small business loan. This is because not many people can pay for a car, house, business, or college education with the money they have in their checking account. You can improve your credit score, which can lead to lower rates on future loans by properly managing your debt by paying your monthly payments. Hence, it is important to pay your monthly payments on time to not hurt your credit score.

What are the consequences of Personal Debt?

Personal debt can have major consequences on your life and finances depending on how much debt you have, and what type. Having too much personal debt can mean you owe far more on your payments than you can afford. The most common way people take on too much personal debt is through credit cards. With the accessibility of a credit card, many people tend to spend more than they can payback. Finally, if you have too much debt, you might have to file for bankruptcy to get these debts partially or fully forgiven. Therefore, too much debt can harm your credit score, which can lead to higher interest rates on future loans.