What is a smart debt?
Monday, 5 November 2018
Debt knocks on nearly every American's door—in total, we carry more than $12 trillion in debt for homes, cars, and consumer spending, according to Nerdwallet.
While Shakespeare's “neither a borrower nor a lender be" is still good advice today, there are loans that can help you move ahead financially as an investment in your future. Sometimes called “good debt," money borrowed for things that will appreciate and bring a return such as a home or a business is generally considered a “smart" loan; debt racked up for things that don't appreciate, such as dinners out, clothing, and vacations, actually sets you behind.
Smart debt vs. dumb debt?
Everyone's situation is different,so a smart loan for one person may not be for another. For example, you might think taking out a loan to fund a business is a wise use of your credit. But if you don't run the business well and it goes under, you're left with a debt that you can't repay.
There are many options for paying back loans—and in some cases, consolidating them into one payment with a lower interest is the answer—but make sure you don't turn a smart loan into one that isn't.
Financial expert and MoneyTalkNews.com CEO Stacy Johnson says it's critical to understand the loan. “If you take out a mortgage loan you can barely afford, or without understanding its terms, what happens to you isn't the bank's problem. It's yours," Johnson says. “Think before you act. Talk to people smarter than you. And when it comes to any loan, remember that every dollar you pay in interest puts you one dollar further from financial freedom."
How to pay back loans quickly and efficiently
Tayne says to get a free copy of your credit report and make sure you are keeping track of all outstanding creditors. “Make a battle plan and start getting ahead. You may want to consider setting a reminder in your phone or signing up for automatic payments to help you get back on track."
Here's Johnson's advice on paying down bad debt as quickly as possible:
1. Download a budgeting app such as Mint and begin using it to track your expenses. Figure out where your money's going and find places to cut back.
2. Make those savings your "debt destroyer." Apply every dime to your bad debt. If you have more than one debt, apply it to either your smallest debt, or the one with the highest interest rate.
3. Once you've eliminated your first debt, take that old payment and apply it to the next debt.
4. Keep using this technique, called "snowballing," until all your debts are gone. Johnson says to learn from your mistakes. “If your debt came from living beyond your means, learn this simple lesson: You have the opportunity in life to either look rich or be rich, but you likely won't live long enough to accomplish both. Make a choice. The earlier the better."
The content provided is for informational purposes only. Neither BBVA USA, nor any of its affiliates, is providing legal, tax, or investment advice. You should consult your legal, tax, or financial advisor about your personal situation. Opinions expressed are those of the author(s) and do not necessarily represent the opinions of BBVA USA or any of its affiliates.
Links to third party sites are provided for your convenience and do not constitute an endorsement. BBVA USA does not provide, is not responsible for, and does not guarantee the products, services or overall content available at third party sites. These sites may not have the same privacy, security or accessibility standards.
You may also be interested in:
How to avoid bankruptcy
Are you deep in debt? Bankruptcy should be a last resort. Check out our advice for how to manage and overcome your debt without declaring bankruptcy.
Tips for managing debt
Carrying too much debt? Here's how to create a 3-step plan to begin paying it off.