Young people are just starting to face the many financial decisions that can impact their lives. While some types of debt, like mortgages or auto loans, may be necessary at times, many types of debt can be avoided with financial discipline and smart choices. Credit cards, payday loans, and other high-interest debts can start a vicious cycle of owing more to creditors monthly. Understanding the sources of avoidable debt is key to gaining financial freedom and stability at a young age. Here are seven common sources of debt that young people should avoid when possible.
Credit Cards
Credit cards charge notoriously high-interest rates, especially if you do not pay the full monthly balance. You must only use your card for what you know you can pay off completely immediately. Paying just the minimum due each month causes interest to accumulate and the balance to grow over time. Besides, using a credit card is just spending money you don’t even have and can quickly become a form of addiction. A budget can help you with overspending if you do get into it. Pay off any existing credit card balances before interest charges are applied.
Student Loans
While student loan debt cannot always be avoided, keep borrowing to a minimum. Explore free courses, scholarships, work-study programs, and less expensive schools. Understand student loan interest rates and terms before borrowing. Make interest-only or higher payments to pay loans off faster. The sooner you can pay off student loan debt, the less you will pay interest charges over the life of the loan.
Car Loans
Buy a used car instead of a new one to avoid substantial depreciation and interest charges. Save up to pay cash or make a large down payment. When financing is necessary, explore options from credit unions, banks, and peer-to-peer lenders to compare interest rates. Make payments higher than the minimum to pay off the loan faster. Once the car is paid off, continue making payments to yourself for your next vehicle purchase.
Personal Loans
Avoid personal installment loans for non-essential items. Only borrow what you can afford to pay off quickly. Compare rates from multiple lenders. Pay off the loan before the term ends to avoid paying excessive interest charges. Make payments from your budget before taking on new borrowing. Installment loans for luxury goods or consolidating unsecured debt should be avoided. If it doesn’t complicate things, why don’t you try borrowing from family?
Medical Debt
Medical emergencies often cannot be avoided. However, you can prevent accruing medical debt by budgeting for health insurance coverage and medical expenses. Negotiate directly with hospitals or doctors to set up affordable payment plans. Explore options for medical debt relief through charities and nonprofit organizations that can offer grants and additional assistance. Compare plans each year during open enrollment to minimize out-of-pocket costs due to high deductibles or co-pays.
Mortgages
A mortgage allows you to finance a home over 15-30 years. However, avoid buying a house with a mortgage you cannot afford. Compare mortgage rates and lenders. Try to put a down payment of at least 20% so that you have to make smaller amounts over the rest of the mortgage period. Consider refinancing when rates drop significantly below your current rate. Choose a fixed-rate mortgage or shorter-term loan when possible.
Payday Loans
Payday loans should be avoided altogether due to exorbitant fees and interest rates. These predatory loans are designed to keep consumers in an endless cycle of debt. Explore all other options before resorting to payday loans. Ask friends or family for assistance, reduce spending drastically, pick up a side gig, or seek help from charities or government programs. As a result, they should mainly be for emergency purposes.
Conclusion
Young people have the opportunity to make smart financial decisions and establish good habits by avoiding debt when possible. Pay off any existing debt and make a budget to gain control of your finances. Avoid high-interest debts like credit cards and payday loans. Only borrow what is necessary at the lowest interest rate possible. Make paying off debt a priority and continually work to become debt-free by avoiding unnecessary spending and consumerism. With discipline and sound choices early on, you can achieve financial freedom and security for life.
