There are many different types of loans out there. Each one has its purposes and benefits. But each also has their drawbacks and if you’re not wary of some of the dangers of these loans, it could come back to bite you.
Here are some of the more common loans that most households carry. Currently, The Federal Reserve puts the household debt in the United States at $13.5 trillion. Yes, that’s ‘trillion’ with a ‘t’.
When it comes to non-mortgage debt, it’s still pretty high at $4 trillion. That’s what’s called consumer debt, which is basically loans that aren’t a mortgage for your house.
Mortgage for Real Estate – Primary Residence
According to the data released by the New York Federal Reserve, Americans currently owe $9.14 trillion in mortgages nationwide. This is the largest chunk of debt that Americans have.
Mortgages for primary residences are different than for investment properties, which I’ll go into next. Mortgages are typically independent of a down payment. Most first-time home buyers can get $0 down payment mortgages. Most people put 4-10% down.
Here are the scenarios where a mortgage is appropriate:
- You can afford the monthly payments
- There is a good chance the value of your house will appreciate
- You find a house you want to live in long-term
Mortgages for Real Estate Investments
Another type of mortgage is for the sole purpose investing in real estate. So, this is to buy a house and you don’t intend to live in it as your primary residence. That means you want to rent it out or flip it for a profit.
These types of mortgages typically require at least 20% cash as a down payment. That is because it is riskier for the bank to loan you money for an investment than for a house you’re going to physically live in.
Accepting this type of debt is appropriate when you know what you’re doing in real estate investing. If you don’t know what you’re doing, don’t have a plan, or haven’t run the numbers to make sure it makes business sense, then it is absolutely inappropriate to get into this type of debt.
But if you know what you’re doing and you’ve done the due diligence, then it can really work out in your favor. Many average people own real estate as investments and do well for themselves.
Credit Cards
Credit cards are typically consumer loans. You can use it to buy whatever you want, and interest can be anywhere from 4%-25%.
Unlike mortgages, credit cards are unsecured debt. For a mortgage, if you default and stop making debt payments, the bank will foreclose and take your house. If you default on a credit card, they can’t take any assets from you, but they can ruin your credit score, affecting future financing options.
It’s appropriate to use credit cards if you have the cash flow to make at least the minimum payments. Ideally, you should pay off your credit cards completely each month so you don’t have to pay interest.
People who do get stuck in high interest credit card debt will often go to a debt consolidation company like Lance Advisors and consolidate their loans into a single bundle.
Basically, the consolidation company provides the capital required to pay off all existing loans, resulting in a single loan and a single payment going forward. The upside is the interest rates are usually lower, you have to deal with fewer fees and you’re only paying back one entity. This can also often boost credit by paying off existing debts.
Car Loan
Car loans are the other most common type of loans Americans get. Unless you live in a large metro area like New York City or Washington, DC with good public transit, most people have to have a car to live and work.
Most people don’t have the cash upfront to buy a car, so they have to take out a car loan.
Taking a car loan is appropriate when you need a car, you don’t buy anything beyond what you can make payments for, and the interest rates are reasonable.
Unfortunately, many people buy cars they can’t afford payments on. Does it make sense to be making $30,000 a year in income and buy a $50,000 Mercedes? No, it does not, but people do it.
You can also be hoodwinked into higher interest rates. Some people pay as much as 20% interest on their car loan. Again, if that is the case, they can go to a company like Lance Advisors and possibly get that interest rate reduced.
Student Loan
Another common loan that many people have are student loans. The great thing about this is it’s easy to get because they are backed by the US Government.
The downside is that the availability and accessibility of student loans has caused tuition to skyrocket, which in turn causes people to come out of college with heavy debt.
Loans for college is appropriate if you plan on using your degree to get a better paying job. Research shows people with bachelor’s degrees make considerably more money during their lifetime, so it makes sense.
But some go to a private college, take over 6 years to finish, come out with over $100,000 in student loans, then get a job making minimum wage. That’s not a smart move.
Those are the primary types of loans most people get and how each may or may not be appropriate for your specific situation.