Debt is a fact of life. It follows us everywhere and is readily available for many big purchases, like cars and homes. In fact, the average American debt sits at nearly $38,000 a person. This is mostly spread across the four main types of debt: Mortgages, Student Loans, Auto Loans, and Credit Card Debt. Together they total over $13 trillion.
The availability of debt has led to 1 in 5 Americans getting in trouble and having a negative net worth. A negative net worth also factors in assets, such as cars and homes that the debt purchased. Even then, these people still have more debt than money. The rise of student loan debt has also added to this negative net worth problem. Getting a degree is expensive, but once it's earned it can't be "sold", only used for labor.
How much American debt is out there?
According to debt.org, the total amount of debt is closing in on $14 trillion. That's a lot of debt. However, the amount of debt in each of the categories differs greatly. Most of the debt, $9.4 trillion, is tied up in mortgages. This isn't the worst type of debt, as the underlying asset, the home, gains value over time.
The rest of the debt is either unsecured, not tied to an asset, or secured by a depreciating asset. Assets like cars, which make up $1.3 trillion of debt, lose value quickly. This makes it easy to "go under" in the loan, as your debt may be worth more than the car itself.
Credit card debt also comes with it's own set of issues if used incorrectly. This type of debt makes up just over $1 trillion and can be one of the hardest to get out of due to high interest rates. The APR on a credit card can be well over 25%, meaning that it grows fast if you forget about it. This has caused many to get into tough financial trouble as they hold onto a high credit balance.
The Rise of Student Loan Debt
Some say that student debt is in a crisis. So much so that presidential candidates have made it a top issue in the upcoming elections. Student loans are the second largest debt category, behind only mortgages. Student loan debt recently surpassed $1.5 trillion and causes problems for many in repayment.
It's no surprise that tuition has grown over the last few decades, and student debt has grown with it. Since 1990, tuition has tripled, even when adjusting for inflation. So college has gotten more expensive, while families incomes haven't kept up. College has been seen as the traditional way to earn a higher income, so people are willing to pay, but when things don't go right, they get into trouble.
When is debt a bad thing?
Debt is a great tool to help you afford things that you normally can't, such as a home. However, it can become a problem if you aren't able to fulfill your obligations. Debt makes you pay more than you would straight up and takes from your future income. When deciding to take out debt, you need to decide if you can afford the payments, even if something were to happen in your life.
This is where budgeting can be important. Having a proper budget lets you know where your money is going and how it can be spent. It's also important to have an emergency fund, typically 6 months of your income, in case anything were to ever happen.
Has debt been causing issues for you? If you have student loan debt, Defynance can refinance student loans using an income share agreement. An income share agreement is debt free and bases payments off a percentage of your income. This means that payments adjust to your situation in life. If you lose your job or pursue more education, payments will pause, leaving you to focus on the important things. You can apply for the program here.
