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Ah, debt and loans. The great topics of the century. Literally. It’s not just a random, one-off figure. Consumer debt has only been a major issue over the last century, give or take. Sure, there was debt before this. Heck, the US treasury was developed by Alexander Hamilton in the 1700s on a debt system. (You’ve seen Hamilton the musical, right?) After the first bank was developed in the mid-1700’s mortgages were a thing, but they weren’t common.
The history of consumer debt and loans
Consumer debt didn’t start to become so widespread until about 1919 at the offering of the first car loan, and within ten years, two-thirds of cars were purchased on credit. While the first US mortgage was in 1766, they really weren’t common at that time. In fact, US mortgages didn’t really start to become a common issue until 1949. It wasn’t until 1949 that the mortgage debt-to-income ratio started to rise from a mere 20% up to 73% by 2000.
What’s our debt like now?
As of 2021, the USA alone holds $14,600,000,000,000 in consumer debt. For an easy-to-read version, that’s 14.6 trillion dollars. Unfortunately, that giant amount of debt is divided by 340 million Americans, with the average person holding a little over $90,000 in debt. It’s also only gone up since the start of Covid.
- $10.3 trillion is on mortgages
- $1.57 is on student loans
- $1.3 trillion is on car loans and leases
- $836.2 billion is on credit cards and retail credit cards (this number has actually gone down almost $100 billion dollars since 2019)
- $323.5 billion is on personal loans
What else do I need to know about debt and loans?
Well, now that you know a bit about the current debt crisis and the history of debt, it’s time to dive into the main categories of debt types. And no, I don’t mean mortgages, student loans, credit cards, etc.
What I’m referring to is the logistics of your debt. How is interest determined? Can your loan grow? Is it a set rate and payment every month? Do you know if your debt is revolving, secured, or unsecured? Do you even know what that means?
If not, no worries because that’s what I’m here for! These are all questions I didn’t even know needed to be asked until about two years ago. For me, it used to just be, what’s the interest rate, and can I make extra payments. Now I know better.
So without further ado, here are the nitty-gritty things you really should know about your debt.
What you need to know about secured debt
A secured loan is defined as a loan that is backed up with some form of collateral. Using collateral as a means of loan guarantee can be done for various reasons, such as if it is a very large sum you’re borrowing, or if you don’t have the best credit score (or little credit history). Collateral is really just a way for the lending party to protect itself.
Sometimes, having a secured loan means you can actually have a lower interest rate. A very good example of this is a car loan. The collateral, in this case, is the car itself. You pay the car loan, and you get a low-interest rate, and, if for some reason, you are no longer able to make payments, the lending agent will repossess your car.
Some examples include;
- Auto loans
- Credit cards where you need to put down a deposit
- Life insurance policies
- Insurance on expensive items such as antiques or jewelry
An unsecured loan, if you haven’t already guessed, is a type of loan where there is no deposit or collateral. There is nothing securing this loan that you will forfeit if you default on the loan. There are still consequences, though. In this case, these consequences usually come by way of large fees and lower credit scores (which can prevent you from collecting more debt in the future). This type of debt often has a much higher interest rate as well. Think credit cards where the interest often starts at 20%.
Some examples include:
- Credit cards
- Pay day loans
- Personal loans
- Student loans
Have you heard of this term before? If not, you’re not alone. However, I’m sure you know examples of revolving debt, the most well-known being credit cards. Essentially, revolving debt is where you have a set amount of funds you can borrow, for example, a credit card with a $1000 limit. If you’re carrying a $200 balance on the card, that means you can only spend $800. If you pay off that $200 balance, though, you have full access to the $1000. You can go through the cycle of using and paying it off over and over again.
Examples of revolving debt include:
- Credit cards
- Lines of credit
- Some bank loans
On the other hand, you have debt that is not revolving. You get your set amount, you get instant access, but if you pay it off, you don’t get to use it again. Once it’s paid off, it’s gone.
Examples of non-revolving debt include:
- Car loans
- Some bank loans
- Student loans
What did you learn about debt and loans?
Was there something you learned about different types of loans and debts? Something you wish you’d known sooner or want to know more about? Share in the comments!
About Chloe Morgan
Chloe Morgan grew up living with a tight budget. In her late teens and early 20’s all the lessons she’d learned started to slip, like it does for many college age students on their own for the first time, and with their first credit card. As she’s gotten older, she’s started to deal with the repercussions and has taken on a frugal way of living, keeping her costs low, as she pays off debt and saves for her future. Chloe lives in Northern Ontario, Canada, with her cute dog, Rhea.