Finances - Understanding Debt

In order to live the "Thrive Live", we should have a clear understanding of debt. When we know we grow!

by Angela Burton on December 02, 2019

Shackled with Debt?  You are Not Alone.

Do you owe money to a bank, financial institution, other organization, or even an individual?  If so, then you have financial debt.  Debt is money borrowed by one party from another.  There are many types of debt and even more reasons for debt.  Understanding debt is the first step in being able to Thrive in our finances. Don’t stop at understanding debt continue in your “Thrive Life” by increasing your knowledge of debt, learning how to reduce and eliminate debt and by investing and building wealth to grow your net worth. 

UNDERSTANDING DEBT

What is debt?

Debt is any amount a borrower owes a lender.  Debt allows a borrower to make large purchases, like houses and cars, without having the entire purchase amount on hand.  The borrower pays the lender an interest rate as compensation for the lender’s risk of not being paid back.  The interest rate is determined by the lender’s assessment of the risk; the riskier the loan, the higher the rate.  The terms of the loan will indicate the interest rate as well as the time period over which the loan is to be repaid.

Proverbs 22:7 reads “The rich rule over the poor, and the borrower is slave of the lender” (ESV). This scripture clearly indicates that debt is a form of bondage.  Dr. DeForest B. Soaries, Jr. says in his book, “Consumer debt grips millions of people with plastic shackles every bit as powerful as the iron chains that once bound slaves.”  The figures below may help us better understand why Dr. Soaries and others consider debt to be such debilitating bondage.

What is the state of debt in the United States?

Most Americans have some form of debt.  According to NerdWallet's 2015 American Household Credit Card Debt Study, the average American household has over $90,000 in total debt.  That average includes debt free households.  The average total debt for only those households with debt is nearly $131,000.  The averages by various debt types as of the fourth quarter of 2015 are shown in the table below.

Type of debt

Average for households with this type of debt

Total U.S. debt of this type

Households with this type of debt

% of American households with this type of debt (approximate)

Overall average household debt (includes debt free households)

Credit cards

$15,762

$733 billion

46.5 million

35%

$5,517

Mortgages

$168,614

$8.25 trillion

48.9 million

36%

$60,700

Auto loans

$27,141

$1.06 trillion

39.1 million

29%

$7,871

Student loans

$48,172

$1.23 trillion

25.5 million

19%

$9,153

All debt

$130,922

$12.12 trillion

92.6 million

69%

$90,336

DATA SOURCE: NERDWALLET.

Consider the households with $15,762 in credit card debt.   With an average 16.7% interest rate, payments of $225 per month, and NO additional purchases, it would take 21 years and 9 months to pay off the balance.  The total payments would be $58,725, which includes $42,963 in interest!  (So think twice before you use your credit card.  That meal or suit could cost you 3-5 times the price on the tag).  Note, raising your monthly payment by $100 to $325 would reduce the repayment period by nearly 15 years down to 6 years and 10 months and reduce the total payments to $26,650, which includes only $10,888 in interest.

Clearly debt is a significant issue for many of us.  There are many different types of debt  let’s explore the different types of debt and learn how to understand credit reports and credit scores.

Tags: credit, debt, financial

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