What to know about debt and how to deal with it | finder.com

What you need to know about debt

We value our editorial independence, basing our comparison results, content and reviews on objective analysis without bias. But we may receive compensation when you click links on our site. Learn more about how we make money from our partners.

Learn how to deal with debt and take charge of your finances in this comprehensive guide.

Unless you’re one of the privileged few, debts of all different sizes ate part of life for most Americans. From running up a credit card bill during an online shopping spree to borrowing hundreds of thousands of dollars to buy a home, living with debt is something you’ll probably have to deal with at some stage.

But when debt gets out of control, it can place you under serious financial and emotional strain, producing severe consequences that could follow you for the rest of your life. Let’s take a look at the different types of debt and how you can deal with them.

What is “debt”?

Debt is money you owe to a third party, typically a bank, credit card provider or some other type of lender. You get in debt when you borrow money to purchase something, for example a home or car, or you use a credit card to spend money that isn’t actually yours.

When you borrow money you need to pay it back, but as well as the amount you borrow (the principal) you also need to pay off the interest that accrues on your loan.

Is being in debt bad?

It might sound surprising to some, but debt isn’t necessarily a dirty word. So what’s the difference between good and bad debt?

If your debt costs you money — in the form of interest charges — and will not help you build wealth, it’s considered bad debt. Borrowing money through a personal loan or credit card to purchase something that isn’t going to rise in value, such as a car or just day-to-day purchases, will only cost you money and is bad debt.

What is “good debt”?

Good debt is the type of debt that will lead to an overall improvement in your long-term financial standing.

For example, when you take out a home loan to buy a house, you’re borrowing money to buy an asset that will appreciate in value. You’re often better off taking on this type of debt than trying to avoid it.

What types of debt are there?

Home loan debt

Taking out a home loan could see you borrowing several-hundred-thousand dollars or more, so home loan debt will probably be the biggest debt you have to deal with throughout your life.

Because home loan debt is so large, the interest charges on the money you borrow add up to a significant amount over the life of your loan. You’ll also spend many years paying off your home loan, so financial discipline is needed. Making extra repayments, if allowed, as well as regularly reviewing your mortgage to see if you can get a better interest rate on your home will help you pay down your debt.

Credit card debt

The instant gratification of credit cards can sometimes make it easy to spend money without thinking about the consequences. Unfortunately, once interest charges start to accumulate on your credit card charges, your debt levels can quickly rise.

Credit cards charge some of the highest interest rates around, with some cards carrying rates as high as 20%. And if you’ve run up a hefty bill on more than one card, the level of debt can skyrocket.

Personal loan debt

In life, sometimes you need fast and easy access to money for all manner of important purposes, such as renovating or buying a car. The money from a personal loan can be used for just about anything, but personal loan debt can be dangerous if you can’t afford to pay it off.

If the loan is secured by an asset, for example if your car loan is secured by the car you purchased, you run the risk of the lender repossessing the vehicle. While there’s no such risk with an unsecured personal loan, their higher interest rates can end up costing you thousands of dollars if you don’t pay your debt off quickly.

Payday loan debt

Short-term loans, which offer short-term financing solutions and quick access to cash, can often seem like an attractive solution if you’re in urgent need of funds. However, they attract some of the highest fees and can lead you deeper into debt. You should only apply for a short-term loan if you have no alternatives.

Business debt

The old saying that you’ve got to spend money to make money holds true for many businesses, but sometimes it can result in a substantial amount of business debt. While you need to spend money to buy inventory, expand into new markets and grow your business, this often involves borrowing money to access the necessary capital.

From business loans and business credit card bills to all the other overheads involved when starting and running an enterprise, it’s possible to get in over your head — especially if the economy takes a turn for the worse.

If business debt gets too much for you to cope with, it’s important to take action sooner rather than later. Prioritize your payments, consider debt consolidation loan options, and seek professional financial advice to help you get back in the black.

Tax debt

Tax time can sometimes bring a nasty shock and leave you with a hefty tax bill. A loan for tax debt is an option that can offer financial support and help clear up your name with Uncle Sam. But, you have other options as well.

If you can’t afford to pay the bill right away, you can apply for a short-term extension that grants you 120 days or less to pay your taxes. You also have the option of applying for a monthly payment plan to make repayments simpler.

And if the full amount of what you owe is too much for you to handle, you could apply for an offer in compromise with the IRS and settle your debt for less than the billed amount.
See what you could save with a debt consolidation loan

What are the different ways of dealing with debt?

If you’re struggling with debt, there are plenty of options available to help you take charge of your finances.

Debt consolidation personal loan

If you’re paying interest on multiple debts and you’re struggling to make repayments, it might be time to consider a debt consolidation loan. Designed to help you take control of debt, these loans allow you to roll multiple debts into one loan. This means you only have one monthly repayment rather than several, and that you can consolidate high-interest-rate debts to a lower rate.

If you decide a debt consolidation personal loan is the right option for you, make sure to compare a range of loans and only borrow from a reputable lender.

Balance transfer credit card

Balance transfer credit cards allow you to transfer your existing credit card debt over to a new card. You will then pay low or 0% APR on that balance for a set introductory period. This means you can avoid high interest charges and consolidate your credit card debt, providing significant savings as you pay off the money you owe.

However, make sure you’re aware that a balance transfer fee may apply and these cards usually also charge an annual fee. Keep in mind that once the introductory period ends, the interest rate will revert to a higher rate.

Consolidating debts into your home loan

Refinancing your home loan can help you find a better interest rate on your mortgage, but it can also be used to help you consolidate debt. By refinancing to a debt consolidation home loan, you can combine credit card and personal loan debt with your mortgage, resulting in one monthly repayment to pay down multiple debts.

You’ll need to closely consider the interest rates and fees offered when refinancing, making sure to compare loans from a variety of lenders. You should also be aware that consolidating short-term debt into a mortgage with a 30-year term may not work out to be the most cost-effective option.

Debt settlement agreement

A debt settlement agreement is a binding agreement between you and your creditors. If you enter into such an agreement, your creditors agree to accept a certain amount of money that you can afford to pay, over a specified time period, to repay the money you owe. Once you’ve paid this money, there is no way for your creditors to recoup the rest of your unpaid debt.

However, debt settlement agreements should only ever be considered after you’ve explored all other options. This option for debt relief can stay on your credit report for seven years and can have a seriously detrimental impact on your ability to access credit.
Tips for settling a debt on your own

Bankruptcy

If you’re unable to pay off your debts you can apply for bankruptcy. This step is a last resort and should only be taken after you’ve explored all other debt consolidation options and sought professional financial and legal advice.

Bankruptcy is when you are legally declared unable to repay your debts. Applying for bankruptcy will mean that you are legally released from most of your debts, but it can seriously prevent you from accessing credit in the future.

Bankruptcy will be listed on your credit report for 7 to 10 years from the date you become bankrupt.

Free debt management help

Compare debt consolidation loans now

Rates last updated September 21st, 2018

Reveal your potential loan offers and rates

Answer two quick questions to filter the loan offers and get the best one for you.

Select your credit score range

I don't know my credit score

Finally, select where you live.

To get your credit score:

Experian logo

Experian is a leading provider of personal and business credit reporting. Find out your FICO score now for less than the cost of a cup of coffee.

Unfortunately, none of the personal loan providers offer loans for that credit score. If you are in urgent need of a small loan, you might want to consider a short term loan.
Name Product Product Description Min. Credit Score Max. Loan Amount APR
Credible Personal Loans
Get personalized rates in minutes and then choose a loan offer from several top online lenders.
Good to excellent credit
$50,000
4.99%–36% (fixed)
Monevo Personal Loans
Quickly compare multiple online lenders with competitive rates depending on your credit score.
580
$100,000
3.09%–35.99% (fixed)
Even Financial Personal Loans
Get connected to competitive loan offers instantly from top online consumer lenders.
580
$100,000
4.99%–35.99% (fixed)
LendingClub Personal Loan
A peer-to-peer lender offering fair rates based on your credit score.
660
$40,000
6.16%–35.89% (fixed)
SoFi Personal Loan Fixed Rate (with Autopay)
No fees. Multiple member perks such as community events and career coaching.
680
$100,000
6.990% – 14.865% (fixed)
Payoff Personal Loans
Pay down your debt with a fixed APR and predictable monthly payments.
640
$35,000
5.99%–24.99% (fixed)
NetCredit Personal Loan
Check eligibility in minutes and get a personalized quote without affecting your credit score.
550
$10,000
34%–155% (Varies by state) (fixed)
Best Egg Personal Loans
A prime lender with multiple repayment methods.
640 FICO®
$35,000
5.99%–29.99% (fixed)
FreedomPlus Personal Loans
Consolidate debt and more with these low-interest loans. Cosigners welcome.
640
$35,000
4.99%–29.99% (fixed)
OneMain Financial Personal and Auto Loans
An established online and in-store lender with quick turnaround times. Poor credit is OK.
Varies
$30,000
16.05%–35.99%* (fixed)

Compare up to 4 providers

Questions we get asked about debt

Shirley Liu

Shirley Liu is a program manager at finder, formerly the publisher for Banking and Investments. She is passionate about helping people make an informed decision, save money and find the best deal for their needs.

Was this content helpful to you? No  Yes

Ask an Expert

You are about to post a question on finder.com:

  • Do not enter personal information (eg. surname, phone number, bank details) as your question will be made public
  • finder.com is a financial comparison and information service, not a bank or product provider
  • We cannot provide you with personal advice or recommendations
  • Your answer might already be waiting – check previous questions below to see if yours has already been asked

Finder only provides general advice and factual information, so consider your own circumstances, or seek advice before you decide to act on our content. By submitting a question, you're accepting our Privacy and Cookies Policy and Terms of Use.

US Personal Loans Offers

Important Information*
Even Financial Personal Loans

Get connected to competitive loan offers instantly from top online consumer lenders.

Prosper Personal Loans

Borrow only what you need for debt consolidation, home improvements and more — with APRs based on overall creditworthiness.

LendingClub Personal Loan

A peer-to-peer lender offering fair rates based on your credit score.

SoFi Personal Loan Fixed Rate (with Autopay)

No fees. Multiple member perks such as community events and career coaching.

Go to site