Debt can be both a friend and a foe at times; It can help you to acquire those big purchases and investments. But on the other hand, it may also weigh heavy on your finances when not properly managed. Knowing the different forms of debt and how to manage each one properly is crucial for you to maintain control over your long-term financial goals.
In this article, we have outlined eight of the most common types of debt with some practical ways of handling them successfully.
1. Credit Card Debt
Credit card debt is incurred if you carry over the balances rather than paying for them in full. Carrying over such balances means that it is one of the most expensive kinds of debt with high interest and penalties for late payment. Credit cards are tempting because they are readily available, but compounding interest can add up quickly.
The cards encourage overspending since they are a buy-now-pay-later system. Most people use them to fund lifestyle expenses beyond their means, and thus the balances mount. Another reason is that credit card companies frequently offer promotional low-interest periods, which if not cleared before the terms end, encourages complacency. For individuals struggling with this, debt relief loans may offer a path to consolidating and managing high-interest credit card balances.
How to Handle Credit Card Debt
High-Interest Cards: Start with the cards having the highest interest rates so that the total financial burden decreases.
Use the Snowball or Avalanche Method: Pay off the smallest balances first for rapid victories, or tackle the high-interest balances to save as much money as possible.
Leverage Financial Tools: Apps like Mint or YNAB (You Need a Budget) can help you track spending and allocate funds efficiently.
2. Student Loans
Student loans provided through the Higher Education Loan Program (HELP), are accessible for education but can still feel burdensome when it comes to repayment. HELP loans are income-contingent, meaning repayments are only required once a graduate earns above the threshold (AUD $51,550 for 2023–24). Unlike loans in some other countries, HELP loans do not accrue interest, but they are indexed annually to inflation, which can increase the balance over time.
These loans can take years to repay, particularly for graduates who are unemployed, underemployed, or earning just above the threshold. Many borrowers find it challenging to balance loan repayments with saving for major goals, such as purchasing a home or investing for retirement.
How to Handle Student Loans
Utilise Income-Contingent Repayments: HELP loans automatically adjust to your income level, ensuring repayments remain manageable.
Make Voluntary Payments: Consider allocating extra funds toward your loan to reduce the balance faster and limit CPI-based increases.
Stay Informed: Monitor annual changes to the repayment threshold and indexation rates to plan your finances effectively
3. Mortgage Loans
A mortgage is a large long-term debt that is attached to homeownership. Though often considered “good debt,” it carries the risks of foreclosure if payments are missed. Mortgage terms can vary greatly, with fixed-rate loans providing stability and adjustable-rate mortgages (ARMs) changing over time.
The principal and interest payments in addition to paying property taxes and insurance make the monthly mortgage. Maintenance costs should also be put into budgeting apart from the actual mortgage.
How to Handle Mortgage Debt
Accelerate Payments: Making extra payments toward the principal reduces the overall loan term and interest.
Choose the Right Loan Type: For short-term stays in a home, look at ARMs because initial payments will always be lower. A fixed-rate mortgage is the best for long-term stability.
Maintain a Solid Credit Score: A higher credit score can secure lower interest rates, saving thousands over the life of the loan.
4. Auto Loans
Auto loans enable individuals to purchase a car without needing money upfront. The problem, though, is that cars are rapidly depreciating assets, usually at a pace quicker than loan payments. Therefore, one could become “upside down” on the loan; that is, the value of the car might be less than the amount still owed on it.
Hidden charges may include fees for financing and penalties for paying off the loan early. Such costs add up to the final cost and, therefore, must be scrutinised before signing a loan agreement.
How to Handle Auto Loans
Consider Total Ownership Costs: This includes fuel, maintenance, and insurance, besides loan payments when budgeting for a car.
Negotiate Loan Terms: Do not accept the first offer. Shop around for lenders offering the best interest rates and terms.
Trade Down When Needed: If payments are a problem, sell the vehicle and buy one that is a little less pricey to reduce loan balance.
5. Personal Loans
Personal loans are non-collateralised and are usually considered as a convenient loan for debt consolidation or paying a significant expense. But their interest is highly dependent on the credit-worthiness of an individual and could range from anything.
Personal loans can be applied to home improvements, medical procedures, or expensive purchases. While the options are great, the abuse of such loans towards less necessary expenditure would result in heavy financial burdens.
How to Handle Personal Loans
Understand the terms: Make sure you know your interest rate and fees, then understand your payoff schedule.
Avoid Over-Reliance on Personal Loans: They should be treated as an essential tool to address financial needs, not to enhance lifestyle.
Pay Extra When Possible: Even small additional payments can significantly reduce the loan’s term and total interest paid.
6. Medical Debt
Medical debt usually arrives unexpectedly. One may get some insurance, which includes high deductibles, co-payments, and uncovered treatment, and face unmanageable expense burdens afterward from medical emergencies that affect families.
How to Handle Medical Debt
Research Assistance Programs: Most hospitals and clinics have financial assistance programs for low-income patients.
Use Health Savings Accounts (HSAs): Funding an HSA can be used to pay for healthcare expenses using pre-tax dollars.
Negotiate with Providers: Many healthcare providers will reduce a bill or even work out a payment plan for a patient who discusses financial hardship.
7. Payday Loans
Payday loans are the small, short-term loans often characterised by high interest rates. It can be ideal for emergency financial situations, but you need to ensure that you will be able to pay when you get your next paycheck.
How to Handle Payday Loans
Determine alternative sources: Credit unions as well as not-for-profit lenders mostly offer small dollar loans with the more reasonable terms.
Set a Repayment Plan: Make a direct repayment plan with payday lenders to extend their payment without them charging extra fee.
Seek legal help if needed: If you do not proactively research about the lender you are transacting with, you might fall prey to illegitimate payday lenders who are operating outside the law. If you suspect unfair practices, seek a consumer protection attorney right away.
Helpful Tip 💡If payday loans are your last option to acquire the funds you need urgently, always remember to transact only with legitimate lenders who have an ASIC license. Here at Friendly Finance, we help you save the time and effort you usually need when you reach out to different lenders separately. After submitting your application, you’ll receive a loan match decision within a few minutes.
8. Business Debt
Business debt is an absolute necessity for most entrepreneurs to grow and expand their businesses. However, when it is not well managed, it becomes a profitability inhibitor and personal finances are at risk, especially if the debt is personally guaranteed.
How to Handle Business Debt
Manage Profits Wisely: Pay off high-interest business loans using surplus revenue.
Diversify Revenue Streams: Increasing income sources can make it easier to handle debt obligations without sacrificing business growth.
Refinance or Consolidate: Business debt consolidation loans can simplify repayment by combining multiple debts into one with a lower interest rate.
Debt comes in several different types, each with its own specific challenges and methods for effective management. Knowing the differences from credit card debt to student loans and mortgages allows individuals and businesses to create method-specific approaches as they regain control to eventually achieve financial freedom. Debt can surely become more manageable when armed with the proper tools and resources.
