Believe it or not, debt can be a powerful tool to put you on the path for financial success; it can help you finance an education that will lead to a higher salary or help you build equity. From student loans to payday loans, we rank different types of debt from best to worst.
Student loans help finance education and, within reason, can be considered an investment. “Whether you have $5,000 in student loan debt or you have $50,000 in student loan debt, it hangs over your head,” says Garrett Webb, the Interim Executive Director of the Missouri Council on Economic Education. But there are advantages. You can write off student loans on tax returns, and you’ll likely be paid more in the long run. According to a 2019 survey by the Bureau of Labor Statistics, workers who have a bachelor’s degree earned an average of $1,383 weekly compared with those who those with only a high school diploma who make an average of $749 a week.
Mortgages can also be good because continually paying your mortgage builds equity, which is the amount of your home you own. If you decide to move, you can put that equity toward the new home. The ability to take out a home equity loan, or a second mortgage, is another benefit of building home equity as long as those loans can be paid off. Home equity loans have some risk because your home can be taken away if you are unable to pay back the second mortgage. According to Forbes, 40 million households in the U.S. are “house poor,” meaning they own a home they cannot easily afford.
Business loans help people start new ventures which can improve finances. That is, if they’re successful. The Small Business Association requires a comprehensive plan that explains each stage of the growth of the company and how it will be managed. The plan forces entrepreneurs to consider the pros and cons of starting the business before actually taking out the loan. The Bank of Missouri, Old Missouri Bank, Providence Bank and Heritage Bank of the Ozarks are some Mid-Missouri lenders that help finance small businesses in Missouri.
Auto loans are taken out to help pay for, well, automobiles. With a high credit score, some people can qualify for a loan with 2 or 3% interest rate from car manufacturers. The term length for auto loans can range from 24 months to six years, and the interest rate usually increases the longer the term is. Taking out loans to pay for a car is not always a smart option. Remember, a new car depreciates in value as soon as you drive it off the lot.
Credit cards are essential for building credit, Webb says. It’s not efficient or practical to not have a credit card, Webb says, because there will come a time when you have to pay for a home a car, or healthcare that you can’t afford out-of- pocket. Getting a credit card and paying it off on time every month is the most responsible way to establish good credit, though 47% of Americans do not do this, according to a survey conducted by NerdWallet. This leads to late fees and interest charges.
Personal loans are taken out for serious purposes including debt consolidation, home improvements, weddings and medical emergencies. They are based on the borrower’s credit history and income instead of the borrower’s collateral such as a house or a car. “If you have a longstanding relationship with an institution, they’re going to be more likely to accept you for a personal loan,” Webb says. Long-term employment helps, too. “If you go to Bank of America, and you qualify for a personal loan for $1,000 or whatever, they’re going to be prohibited from charging you some exorbitant amount unlike a payday lender or a title loan.”
Payday loans are so risky that many states do not authorize them. In Missouri, payday loans are short-term loans under $500 that are due within 31 days or on the next payday. “They’re predatory loans,” Webb says, because interest rates for payday loans are extremely high. Interest percentages can be in the hundreds or thousands; whereas, a personal loan is going to be regulated by a financial industry regulator, Webb says. In Missouri, the Annual Percentage Rate for payday loans is 443%.