Household debt has steadily grown in Australia throughout the last three decades as more people seek to buy houses and cars and continue to rely on services such as credit cards. The total personal debt in Australia is over $2 trillion, with the typical Australian household owing about $250,000.
Debt is a serious issue that affects many people in Australia and the rest of the world. That’s why we want to educate people about types of debt and how they can avoid getting into this type of financial trouble.
This informative guide will teach you about types of debt, what causes them, and how to avoid them in the future. Read on to learn!
Causes of Debt
There are many types of debt, but there’s one thing that they all have in common: taking money from someone else.
Debt comes into play when somebody borrows money to purchase something and must pay it back with interest over time. It can be for a home or car loan, credit card balances, student loans, payday loans, etc.
People get into debt because their expenses exceed their income. This causes them to take out additional lines of credit if possible so that they don’t run out of cash. This results in more spending, which increases your chances of getting into even more debt.
Why Do People Stay in Debt?
People stay in debt because it becomes easier and more convenient to put purchases on a credit card than cash. This causes you to spend more money, which again puts you at risk of getting into even bigger types of debt, such as student loans or mortgage repayments.
People get into large types of debt because they do not have the proper knowledge about personal finance management. They lack financial literacy and don’t know how to prepare financially for emergencies like car breakdowns, home repairs, etc. So they keep falling deeper and deeper into types of debt until their situation gets out of control.
Another issue is that some types of loans are not always transparent. Lenders will tell you how much money needs to be paid back, but they don’t show all the fees associated with using their services. This can make the debt seem cheap when in reality, it’s more expensive.
People also stay because they don’t plan for the future. They spend their money on things like daily expenses and entertainment instead of saving for retirement. Or putting away a little bit each month so you can purchase your dream home someday.
How to Avoid Debt
The best way to avoid types of debt is by taking steps towards financial freedom before it’s too late, such as:
Start saving small amounts every single day. Just $20/day will help build up your savings account over time. This could be adding any amount into an automatic transfer into another bank account or opening a high-interest savings accounts and letting the interest compound and grow your wealth over time.
You’ll thank yourself later when you’ve saved enough money to purchase a car or home and avoid taking out types of loans.
You can also prevent debt by planning for emergencies. Even if you have a low income, just saving $50/month will help you build up the bare minimum to get through tough financial times. You won’t need to borrow money from others.
If your job can’t guarantee 100% employment and stability, it’s probably not worth going into large amounts of personal debt.
The main thing is that people need to understand how much work it takes to pay off loans before deciding whether they’re willing to take on this type of responsibility.
How to Get Rid of Debt
If you’re already in debt, there are some simple steps that you can take to get rid of it:
Start by making small changes like meal planning and shopping for groceries at discounted prices using coupons or grocery apps on your phone.
Next, look over each bill carefully and identify areas where costs could be reduced, such as canceling premium channels on cable TV if they aren’t being used. This will reduce monthly expenses, which again helps improve financial health.
You can also work on getting out of debt by negotiating with creditors to reduce your monthly payments. They’ll often agree if you show them that their interest is higher than what can be found in the market today. Or, some might even lower the total amount owed if it’s worth more to them than collecting on a debt that isn’t growing anymore due to late payment charges and penalties.
Sometimes people are afraid to ask for help, but there are free or low-cost non-profit organizations that provide credit counseling services. So don’t be ashamed about asking for assistance when needed.
Debt consolidation is another option. This is when you take out one loan to pay off multiple other types of debt at much lower interest rates, saving money in the long run.
Check out the debt consolidation loan by Plenti, which allows you to consolidate and pay off debt at a lower interest rate than what’s currently offered on the market.
Types of Debt
There are many kinds of debt. Some of the most common types include:
Credit Card Debt
This is the type of debt that accumulates when you use your credit card to make purchases. If those transactions aren’t paid off by the time it comes due, then interest will be charged on top as a penalty.
Credit cards can encourage people to spend more than they should because there is no physical cash exchanged. And some don’t even require full payment every month. Eventually, this turns into large amounts of debt, costing hundreds or thousands in finance charges over several years (or decades).
However, there are ways to get rid of this type of debt in a short period by sticking to a budget. And only spending what you can afford with cash instead of swiping your debit or credit cards for purchases all the time.
Mortgage debt is when you take out a loan to purchase property or even make improvements. These kinds of loans can be used for anything from:
- Purchasing your first home
- Building an addition onto the house
- Refinancing expenses that are no longer affordable with other kinds of types of loans
There are many different kinds of mortgages available depending on what’s included in the cost and how long it will take to pay off all at once or overtime.
Some kinds of debt come from taking out personal loans, like payday or signature loans. They usually don’t require credit checks and are easy to qualify for if you meet the lender’s minimum requirements.
This kind of debt is often used for:
- Paying off other kinds of debts (like medical bills) that aren’t covered by health insurance
- Making a purchase that isn’t possible with cash on hand (like a new car or boat)
There may be tax penalties if this type of loan isn’t paid back according to the agreed-upon terms. It counts as income, so taxes will need to be paid on any amount received. So always make sure there won’t be any surprises when doing this kind of borrowing.
Student loans are one of the most common kinds of debt. They can go into anything from getting an undergraduate degree to a post-graduate doctorate program. But this amount will vary based on what kind of school and the number of years.
The interest rates might seem low at first, but they’ll grow as time goes by. So finding ways to pay them back faster helps reduce those high finance charges over time.
Good Debt vs. Bad Debt
Some kinds of debt are considered good, while others are bad. For example:
Good Debt: Using money to purchase items that will increase value over time (like real estate).
Bad Debt: Borrowing for depreciating material goods like cars or other luxury purchases where the value declines with each passing year.
So make sure you only take out loans for things that will remain valuable. That way, it will be easier to pay back the debt and still have some money left over for other financial goals like retirement or emergencies.
Different Types of Debt Explained!
There are different types of debt that you can get into. But it’s important to know the difference between good and bad kinds, so you don’t end up with too much money owed to others.
The best way to deal with it is to find a budget and sticking to it when possible. And only spending money on things that will increase your net worth over time, like real estate or other kinds of investments.
We hope that this guide gave you a better idea about kinds of debt and how to get rid of it fast. For more informative articles, keep reading our articles.