Debt has become an American way of life. Most people of all ages and from all walks of life incur a level of debt at some time in their lives.
Debt, per se, isn’t necessarily a bad thing. After all, most of us don’t have cash on hand to buy a home or a car or put our children through college. When thoughtfully approached and carefully managed, debt is an acceptable part of a longer-term financial plan. However, debt can easily become a source of worry and risk. Not only do you have to make regular repayments to lenders, but the interest payments on outstanding balances can also quickly mount. If you’re repeatedly late or default on your repayments, it could impact your credit score negatively.
Therefore, it makes sense to understand the different types of debt that most of us incur at different times in our lives and why. In this article, we’ll explore “the state of the debt nation” at the end of 2021 and some practical ways to deal with it.
According to a recent by CNBC, the average American debt is $90,460.
This is largely made up of debt in credit cards, personal and student loans, and mortgages. As of the third quarter of 2021, the total amount of US consumer debt was $15.24 trillion.
The report also shines a light on the average debt balance by age group:
So, what is all this money going towards?
Experian’s 2020 Consumer Credit Review reveals some interesting findings into average debt amounts by debt type:
We’ll explore each of these types of debt in more detail below.
According to the Experian report, nine in ten American adults have at least one credit card.
Many people use credit cards to fund non-essential or luxury items such as clothing, gadgets, jewelry, and vacations. Come month-end, when their credit card bill arrives, they pay only the minimum amount owing. This cycle is evidenced in the findings of the Experian report, which reveals that 75% of adults carry over a balance on their credit cards from month to month.
However, despite the average adult American carrying an average credit card debt of over $5,000, year-over-year data indicates a decrease in this debt overall. Credit card debt saw the largest drop from 2019 to 2020, with the average amount decreasing by 14%.
A personal loan involves you borrowing a specific amount from a lender and paying it back over a specified period through a series of installments. The loan amount, repayment amounts, and repayment terms will be determined by your lender, although some will be open to negotiating these parameters with you. The money borrowed through a personal loan can be used for anything from weddings to home improvements or even debt consolidation.
According to the Experian report cited earlier, almost one in four American adults have a personal loan, with the average amount of this debt being $16,458.
Payday loans are small-dollar credits against future earnings in the form of a paycheck. The lender can take a signed check from the borrower, which the lender cashes on the day of the next paycheck. Alternatively, the lender can take the checking account information from the borrower for a direct withdrawal from the account on payday.
While they are easy to obtain, payday loans are far from cheap. Let’s look at an example. Payday loans are usually around $350. The fee or interest charged by the lender typically ranges from $15 to $30 per $100 borrowed for two weeks. For a $350 loan, the repayment amount is $402.50 in two weeks. The annualized percentage rate (APR) on this loan is approximately 387%.
By comparison, credit card APR rates are normally around 15-30%. So, payday loans are a very expensive way to get a cash advance.
Given the high cost of most vehicles, few people can purchase them upfront, so they take out an auto loan and pay off their car over a few years.
Vehicle loans are currently the second-most prevalent type of debt in the country.
The average amount of debt for car loans in the US is $19,703.
Student loans are how millions of US students pay for their higher education every year. According to the Federal Reserve, the total national student loan debt as of March 2021 was $1.7 trillion. The average amount of debt was $38,792.
Unsurprisingly, people in the 18–29 age bracket account for 34% of student debt, according to the Department of Education.
Despite its steep cost, student debt pays longer-term dividends. Earning a degree generally increases an individual’s future earning prospects. According to the US Census Bureau, people who have a degree make an average of 71% more than their counterparts who only hold high school diplomas.
Home equity lines of credit (HELOCs) give homeowners access to cash by putting their homes up as collateral.
The Experian report indicates that the current average US debt for HELOCs is $41,954. Approximately 12% of American adults have this form of debt.
Mortgage debt is by far the most significant form of debt in the US, with the current average amount of this type of debt standing at $208,185. Approximately 44% of US adults have this type of debt.
Mortgage debt levels are directly linked to mortgage interest rates, which reached unprecedented lows in 2020. This led to many people buying homes in spite of the pandemic and the economic uncertainty it brought.
Debt held by the US public has dramatically risen since 2008, a trend that is forecast to continue until 2029.
Of the 15.24 trillion dollars that US citizens had in debt as of the third quarter of 2021, the majority was home mortgages, at $10.44 trillion. Student loan debt was the second largest component, totaling $1.58 trillion.
The perception of debt differs, depending on its kind and purpose. Most people would agree that a mortgage debt is a “good” investment as it is deemed to provide a degree of security for one’s future and an asset that should appreciate in value over time.
With education costs on the rise, more of the population is currently incurring student loan debt. Student debt has grown significantly over the past several decades. It’s estimated that in quarter two of 2021, Americans owed a staggering $1.73 trillion in student loans. Interestingly, levels of student debt vary quite significantly between states. Citizens in West Virginia are most impacted by student debt, followed by New Hampshire. California and Utah carry the lowest student debt burdens.
Credit card debt is widely viewed as a negative form of debt. Any form of high interest payday loan is also not a form of recommended debt if you are seeking to achieve financial stability and freedom. Concerningly, US consumers’ credit card debt is on the rise, up to $800 billion in the third quarter of 2021 – a $17 billion increase from $787 billion in the second quarter of 2021. Cardholders in New Jersey hold the greatest levels of credit card debt, while those in Kentucky have the least.
Debt can be enticing, but it can also be a deadly trap. It’s not surprising that money worries can place a huge burden on your mental and physical health. Finance-related stress can lead to unwelcome side effects, including:
Equally concerning is that every time you borrow money or go into debt, you’re effectively opening yourself up to the risk of being sued, losing your home or car, or having to file for bankruptcy.
But as we discussed earlier, too many of us end up getting into a cycle of debt because we rely on credit to fund day-to-day rather than longer-term expenses.
Here are a few practical steps to rid yourself of the burden of debt:
Taking small, incremental steps and congratulating yourself for every quick win will give you a sense of empowerment and control. More importantly, it will put you on track to gaining financial stability and security.
As we’ve discussed, debt is a widespread and multi-faceted challenge. Becoming financially stable and secure isn’t an easy task for anyone.
In the current economic climate and lots of uncertainty, we should eliminate any unnecessary or excessive debt.
There’s no one-size-fits-all solution, as every person will have their own set of circumstances and challenges.
Payment flexibility is one approach that’s growing in popularity among employers and employees alike. Specifically, Earned Wage Access (EWA) services, such as that offered by Payactiv, are an increasingly common element of benefits packages.
EWA allows you to quickly access the money you’ve already earned before payday. It can happen in several ways: the funds can be loaded onto a debit or prepaid card, transferred to your bank account, or even picked up as cash at Walmart. Alternatively, Payactiv allows you to use your earned wages to pay for services like Uber and Amazon or pay bills directly in the app.
The best on-demand pay service providers give you choices with how you want to access your money and always provide a free option. Look for the instant deposit feature so you can access your earned wages in real-time in case of emergencies. Some providers also include additional perks like discounts, special offers, budgeting tools, savings tools, and free bill management.
You can get started with Payactiv right away, even if your employer doesn’t offer it.
Join Payactiv and create an account today!
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