A little heeded debt advice as a teen can make the transition in to adult hood easier financially. How? By using debt wisely you will have the knowledge and foresight to see the impacts of your decisions around debt and can use that to your advantage.
Let’s start with an overview of what it means to be in debt. Then we’ll go in to unsecured debt vs. secured debt, interest rates and credit scores and while they all matter.
When you are in debt that means you’ve borrowed money from someone, a bank or corporation that you now owe back to them, usually with some sort of interest payment as well, which is a fee for the priveledge of borrowing the money. There is what is called good debt and bad debt. Good debt can be a mistaken to mean that it’s good to get and that isn’t necessarily the case because taking on too much of any type of debt can be bad. Good debt is considered to be so because it is tax deductible or is being used to create wealth, as in starting a business.
What are Unsecured Loans?
Unsecured loans are loans that you can get with little or no collateral backing you up in case you can’t pay. Meaning, if you fail to pay back these types of loans you typically are not responsible for giving the lender the items you bought with that money. An example would be a credit card. If you buy a washer and dryer with your credit card and ultimately cannot pay your bill you typically will not lose your washer and dryer. That may sound like a license to spend money that isn’t yours with no consequences but that is far from the truth. If you don’t pay they can still come after you in other ways like garnishing your wages or putting lien on you. There are typically much higher costs to borrowing money with unsecured loans. Other types of unsecured loans are personal loans, doctor bills, utility bills, legal bills.
What are secured loans?
Secured loans are secured with whatever you are borrowing the money for. An example would be an auto loan. If you get financing for a car loan and drive around for a few months and then don’t pay your bill they will come to wherever you are and take the car back. They don’t ask, they just do it. Same thing with a house payment. Don’t pay your mortgage and after a while you won’t have a home. Other types of secured debt are boat loans, high ticket electronics and sometimes in order to secure a debt you will have to put something up of yours like your guitar or rings as collateral in case you can’t pay the debt back.
One exception of a secured loan that is attaced to some form of collateral is student loans. Student loans are considered secured debt even though if you don’t pay your student loans they don’t come and take your education away but they can make it very difficult have it forgiven if you don’t pay.
How important Credit Score is to Interest Rates
Something to keep in mind whenever you are trying to borrow money is what is the risk to the one lending the money. If I lend you money with nothing backing it in case you don’t pay me back then I have a lot of risk. If you and I had 5 friends together and you had borrowed money from all of them in the past and paid them back on time with no problems than I would see you as a good risk to lend money to. However, if out of those 5 friends 3 of them saying that you didn’t pay them back on time or at all then I would look at you as a high risk. That is basically what your credit score tells potential lenders about you. If you have a good credit score than lenders are willing to lend at lower interest rates. The interest rate is the fee for borrowing the money. It is better for your to have the lowest interest rate possible and the way to do that is to have the highest credit score.
We hope this debt advice will help you diagnose if debt is a viable option for you.
Really what you want to learn about is getting interest instead of paying it. We’ve created a tool that shows you, in real life, how heeded debt advice and a little investing can create wealth for you.