Personal debt is one of the biggest problems facing America today.
The average debt of any given person is relatively high compared to any other developed country. It is notoriously difficult to get out of debt in America as the economic system often traps the most vulnerable populations into cycles of debt.
This article will cover the most important information regarding debt in America, and how to find debt relief depending on your individual situation.
What Kinds of Debt Are Currently Plaguing the United States?
Many different kinds of debt afflict the American people, from credit card debt, car payments, and student debt all the way to mortgages.
The average American household carries $132,529 of debt.
The most common personal debts overall are:
- Payday advances, or predatory lending, is the biggest component of consumer debt.
- Small business loans
- Farm loans
- Auto debt
- Tax/IRD debt
- Student loan debt
- Revolving home equity credit
- Revolving consumer (credit cards)
- Residential mortgage debt
Surprisingly, credit card debt isn’t actually the biggest villain in the debt debate. However, it is definitely a major stress in many people’s lives. Each of these types of debts comes with its own issues.
Payday Advances Quickly Blow Out of Proportion Due to Extremely High Interest Rates
Payday advances are the most dangerous type of consumer credit hands-down. Many people who find themselves stuck for cash in an emergency turn to payday advances and “quick lenders” to try to borrow their way out of an emergency, but this is NEVER a good idea!
Steer clear of these places at all costs!
It is better to call up friends and relatives and uncomfortably ask for cash.
Because payday lenders or “cash advance loans” prey on people who they know cannot pay back their loans.
They target poor people and help keep them poor, not help them cover their costs and rise out of poverty. These loans are often used in emergencies and people often have trouble being able to pay back the money.
The interest rates come at up to a disgusting 400%, making the loan quickly double or triple in cost. The average American who takes out a payday loan of $375 will pay an additional $500 in interest!
There are a million better alternatives which will not lead you into a vicious cycle of paying back interest and taking out more loans to cover costs. They are very effective at keeping people in poverty because instead of paying off the loan in installments, the principal and the astronomical interest fee are due all at once. This makes it nearly impossible for someone living paycheck to paycheck to raise this money.
Some alternatives to falling into the dirty trick of payday lenders include:
- Nip the problem in the bud before it arises– Set up an emergency fund where you keep money in savings and off-limits except for an emergency. It should ideally cover two months of full costs including rent, childcare, groceries, etc. But any money you can save for emergencies is better than none.
- Compile a list of people you can feel comfortable reaching out to for help during a financial emergency.
- Get a low-interest credit card which you only use when you absolutely need to
- Cut back on spending and overall expenses.
Outstanding Revolving Consumer Credit
“Revolving debt” on credit cards accounts for $953.1 billion of America’s consumer debt.
People often enter into credit card debt due to overspending and being unable to pay back their loan. The thing which ropes people into using credit cards is that there is often a low minimum monthly payment. This is especially true if you originally qualified with a very low interest rate, if you are young, or generally have a good credit history.
The low minimum payment makes it so that even if you have spent over a thousand dollars on your card, you may only have to pay back twenty dollars or so.
This is a psychological trick to make it easier for people to forget that they are in thousands of dollars of debt– how bad could it really be if you only have to pay back twenty dollars a month?
Unfortunately, the interest adds up and causes people serious financial and psychological distress. It is best to use credit cards only when you really need to. Or in small amounts, and pay the balance before it is due each month in order to increase your credit score.
Outstanding student loan debt
Unpaid student loans account for $556 billion in American debt.
The rising cost of tuition coupled with stagnating wages and more people attending scam for-profit universities has led to the average graduate leaving with over $20,000 in debt to both public and private lenders.
Tax Debt to the IRS
Debt owed to the IRS from delinquent taxes totals $345 billion. Most of this comes from delinquency in paying taxes on individual income tax.
Auto Debt Makes up $313.8 Billion
Auto loans are a major source of American debt because it is so normalized for people to have auto loans. Whereas in many countries, people typically wait until they have saved up enough money for a car. In America the “norm” is to buy a car when you cannot afford it and spend five or ten years making payments, therefore accruing thousands of dollars in interest.
The average auto loan exceeds $25,000.
Farm Loans make up about $114 Billion.
The government and private lenders often give out loans to owners of large land holdings in order for them to begin the process of developing the land and making it productive for agriculture or animal farming.
Over 60% of all farm loans are for less than $200,000.
Mortgages are the major aspect driving the United States Debt Crisis
Collectively, Americans owe over 14.6 trillion dollars on their mortgages.
Yes, that’s trillion, not billion. This blows all other categories we have discussed completely out of the water. Especially when borrowers have declining values of their homes, these mortgages can cause a lot of anxiety because there is no guarantee homeowners will be able to sell their homes at a reasonable price.
However, the amount of mortgage debt has been declining in recent years since 2010, so hopefully this is a good outlook for the future of the housing market and the debt crisis overall.
So what are my options for dealing with all this debt?
Now that we have discussed all the reasons Americans are in debt, you may be wondering how anyone ever gets out of debt. There are a few ways you can try to combat this.
The main three pathways people take after finding themselves in extreme debt include:
- Struggling with it, attempt to pay it off gradually, but eventually finding themselves in more debt over time. This option is not ideal because most people who take out loans struggle to pay their bills, much less their debt. Just assuming you can pay off your debt without help sometimes gives people much more financial trouble than they were in initially
- Filing for bankruptcy. This is a really bad option. Bankruptcy stays on your credit history report for up to ten years, and this can affect your ability to get an auto loan, mortgage, or credit card. It should 100% be considered only as a last resort in the case of extreme financial breakdown. It usually is possible to recover from debt without filing for bankruptcy, but again many financial institutions would prefer you file for bankruptcy because they make money off of your debt. This bankruptcy filing may even hurt you when applying for jobs if they run a credit check on you.
- Trying to consolidate your debt
What is consolidation?
Debt consolidation is the process of combining multiple different debts into one account in order to decrease the level of interest and increase the convenience of repaying the debt.
Debt consolidation essentially works through a debt relief company buying your debt from you. You take out a loan from a consolidation company and use it to pay off all the other loans, thereby making it so instead of paying all your lenders, you pay off only the one company who issued you the loan.
For example, say you have $5000 in debt spread out over five different credit cards. Your average annual interest is 18%. If you are paying $125 a month, then a full two thirds of it are going towards paying interest. The debt will be gone after 273 payments at this rate, which is almost twenty years. This assumes that you won’t be accruing any more debt in the process, which is typically not possible, since people still have to pay their bills.
If you were to consolidate your debt to a low-interest loan for the above scenario with only a five percent interest rate, you could be paying only $95 a month over 60 months, with only $20 going towards interest. Obviously, this is a better scenario. The only issue is that this is not possible for everyone- only some people can qualify for consolidation loans.
Benefits of Consolidation
The benefits of consolidation are all about convenience. Instead of remembering to pay ten or fifteen or even twenty debt bills a month, you can focus on only paying one. This will reduce your likelihood of missing payments, therefore running up fees and hurting your credit and payment history.
The good thing as also that you don’t have to put up any property for collateral. You can pay off more of your debt more quickly if you are able to secure a low interest rate. Consolidation loans are unsecured, as opposed to secure loans which require you to also put up something like a car or house as assurance that you will pay back the loan, so less is at risk, especially compared as an alternative to bankruptcy.
However, you can consolidate with a secure loan, such as refinancing your house. The benefit of this is that you will often be able to secure a much much lower interest rate, but you will still be at property risk. That means you should definitely only take out a secured refinancing note if you know you will be able to pay it back at the agreed rate.
Benefits of Consolidating Student Debt
Student loan debt is one of the best debts to consolidate. That’s because many student loan companies are low-interest anyways, so consolidating this debt is often beneficial.
Also, it is illegal to consolidate public student debt with private student debt. So if you have both types, you will have to take out a private consolidation loan and also do student loan consolidation through the government, which happens to be relatively easier.
Benefits of Consolidation to Tax Debt
Consolidating your debt to the IRS can be helpful if you have been delinquent on paying your taxes many times or in multiple states. Especially if you consolidate using a bank loan, many loans are less expensive than an IRS installment payment plan, which can sometimes cost you a huge amount of money each month depending on how much of your taxes you owe.
Consolidating your income tax debt can also be useful because you are avoiding late penalties that accumulate over time. Plus now you can start applying for a tax refund even if you still owe money on your consolidation loan, since technically the IRS debt is already paid off using your new loan.
The Psychological Benefits of a Debt-Free Life
Like anything, it is crucial that you don’t rush into loan consolidation to avoid making a harmful life decision that will affect you for a long time coming. There are many risks of debt consolidation, mainly that you are just transferring it as opposed to truly decreasing the debt, as many “debt relief” companies would like you to think.
However, on the other side of things, it is proven that a life free of debt has extraordinary psychological benefits, and paying it off can truly improve your life.
Those who struggle to pay off debt are twice as likely to develop depression and anxiety disorders, and arguments about money between couples in debt are often a major predictor of divorce.
By consolidating and paying off your debt quicker, you can help your mental and emotional health, leaving you to feel better about yourself and your future. You will have freed up your mind to pursue your creative needs and really throw yourself into developing a career instead of being trapped in the cycle of debt.